Annual investments are being made so that $20,000 will be accumulated at the end of 10 years.

the interest rate on

these investments is initially expected to be 4 percent compounded annually. After 4 years, the rate of the interest is
unexpectedly increased to 5 percent, so that payments for the remaining 6 years can be reduced. What amounts
should be invested annually for the first 4 years and what sums for the last 6? Please provide steps in your answer

Answer

First, we need to nd the annual payment at the rate of 4%, then need to take the accumulated value of
the annual payments for 4 years at the end of 10 years and deduct it from the total required accumulated
value and need to nd the yearly payment of the remaining amount required.

The formula is:

FV=future value=20000

A=anual payments

n=years=10

r=interest rate=4%

Using values and formula:

The annual payment for the rst 4 years is $1665.81889

Now, we need to nd the future value of this 4 payments at the end of 10 years

The formula for it:

n=4 years and m=10-4=6 years and i=5%

Using the formula and values:

The value of the 4 annual payments is $9479.62208. we need to make it $20000, so the remaining amount
to accumulate in the account is

=20000-9479.62208=10520.3779

Now, we need to nd the annual payment for the remaining 6 years, which can accumulate $10520.3779 at
5% interest rate.

Using the values and the rst formula used for the annual payment:

The last 6 yearly payments will be $1546.68

The amount required to invest for the rst 4 years is $1665.82 and the amount required invest for last 6
years is $1546.68

Comment