Nancy would like to accumulate $10,000 by the end of 3 years from now to buy a used car from her friend,Jin. She has $2,500 now and would like to save equal annual end of year deposits to pay for the car.

Question

Calculate how much should she deposit at the end of each year in an account pay 8% interest to buy the car at the end of 3 years.

Answer 1

Amount to save = 10,000-2500=7500
Use the future value formula:
A=F*(A/F,0.08,3)
=F(i)/((1+i)^n-1)
=7500*0.08/(1.08^3-1)
=2310.25

Note: each payment is even less than 7500/3=2500 because the first two payments earn interest at 8%.