As part of your personal budgeting process, you have determined that in each of the next five years you will have budget shortfalls. In other words, you will need the amounts shown in the following table at the end of the given year to balance your budget-that is, inflows equal out-flows. You expect to be able to earn 8 percent on your investments during the next five years and wish to fund the budget shortfalls over these years with a single initial deposit.
End of Year Budget Shortfall
1 $ 5,000
a. How large must the single deposit today into an account paying 8% annual interest be to provide for full coverage of the anticipated budget shortfalls?
b. What effect would an increase in your earnings rate have on the amount calculated in part a? Explain.
a. The single deposit would be the present value of shortfalls. Since the shortfalls are different amounts we can treat then as a single sum in ...
The solution explains how to calculate the amount needed to meet the budget shortfall.