Present Value of a Lump Sum
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P3-5. Robert Blanding's employer offers its workers a two-month paid sabbatical every seven years. Robert, who just started working for the firm, plans to spend his sabbatical touring Europe at an estimated cost of $25,000. To finance his trip, Robert plans to make six annual deposits of $2,500 each, starting one year from now, into an investment account earning 8% interest.
a. Will Robert's account balance in seven years be enough to pay for his trip?
b. Suppose Robert increases his annual contribution to $3,150. How large will his account balance be in seven years?
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a. FV = 2,500 × FVAF (6, 8%) = 7.3359 = $18,339 × 1.08 = 19,806 (as he will make the
deposits in ...
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