Annuities and Sinking Funds - Calculating Lump Sum Needed
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Carolyn Ellis is setting up an annuity for her retirement. She can set aside $2,000 at the end of each year for the next 20 years and it will earn 6% annual interest. What lump sum will she need to set aside today at 6% annual interest to have the same retirement fund available 20 years from now? How much more will Carolyn need to invest in periodic payments than she will if she makes a lump sum payment if she intends to accumulate the same retirement balance?
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Solution Summary
A step by step solution is provided through calculations with small worded explanation. The expert calculates the lump sum for sinking funds.
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Solution:
First let us compute the future value of annuity of 2,000 at 6% for 20 years
Here R = $2000, i = 0.06, n = 20
FV = R((1+i)^n-1)/i
FV ...
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