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Patricia and Joe Payne are divorced. The divorce settlement stipulated that Joe pay $550 a month for their daughter Suzanne until she turns 18 in 3 years. Interest is 6% a year. How much must Joe set aside today to meet the settlement? (Do not round intermediate calculations. Round your answer to the nearest cent.)

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facundobuzzetti

Answer:

Present Value= $18,079.05

Explanation:

Giving the following information:

Monthly payment= $550

Number of months= 3*12= 36 months

Interest rate= 0.06/12= 0.005

To calculate the lump sum to set aside to pay the settlement, first, we need to calculate the future value:

FV= {A*[(1+i)^n-1]}/i

A= monthly deposit

FV= {550*[(1.005^36) - 1]} / 0.005

FV= $21,634.85

Now, the present value:

PV= FV / (1+i)^n

PV= 21,634.85 / (1.005^36)

PV= $18,079.05

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