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Cosmos Touring wishes to replace its luxury bus in 10 years by accumulating funds in a special...

Question:

Cosmos Touring wishes to replace its luxury bus in 10 years by accumulating funds in a special account. The new bus is expected to cost $180,000. How much must Cosmos put into the fund in equal, end-of-year amounts if earnings are expected to be 8% for the first 4 years and 10% thereafter?

a. $12,107

b. $11,465

c. $9,901

d. $14,727

Value of an Annuity:

An annuity is a collection of equal cash flows paid each year into an account. An annuity deposited at the end of each year is an ordinary annuity. To estimate the value of an annuity, we apply the concept of the time value of money which states that a dollar today is worth more than a dollar in the future. The future value of an annuity is the amount expected in the account after the annuity has been compounded. We, therefore, need to know the interest rate applied, the future value, and the time period over which the annuity will be deposited

Answer and Explanation: 1

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  • b. $11,465


The future value of the payments in the first 4 years is estimated as;

n = 4 years

r1= 8%

r2 = 10%


{eq}\begin{align*} \ FV _{OA} &...

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What is Annuity? - Definition & Formula

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Chapter 2 / Lesson 7
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An annuity is a fixed amount of income paid at regular intervals, such as monthly or quarterly. Learn the definition and formula for annuity, review examples of annuities, and understand how to determine the value of annuities.


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