Question

(d) Assume that 4 years from now you will need $1,000. Your bank compounds interest at an 8% annual rate.
(i) How much must you deposit 1 year from now to have a balance of Sh.100, 000 at Year 4? [2 marks]
(ii) If you want to make equal payments at the end of Years 1 through 4 to accumulate the Sh.100, 000, how large must each of the 4 payments be?

Answer 1

I) Amount, $A=P(1+r/100)^{n}$

$100000=P(1 +8/100)^{4}=1.36049P$

$P=100000/1.36049= sh. 73502.93$

II) $100000-73502.93=sh.26,497.07$

each of the four payments $=26497.07/4=sh. 6,624.27$