Hi,

Can anyone please help to explain this question? I am having a trouble with these kinds of problems.

Gerard Jones plans to save for his 5-year doctorate degree, which starts 6 years from now. The current annual expenditure is USD7,200 and it is expected to grow by 7 percent annually. Gerard will need to make the first payment 6 years from today. He identifies a savings plan that allows him to earn an interest of 8 percent annually. How much should Gerard deposit each year, starting one year from today? Assume that he plans to make 5 payments.

Explanation:

A is correct. This problem can be solved in three steps.

Step 1: Find the annual expenditures

Annual Expendituret=6=7,200 (1+0.07)^{6}=USD10,805

Annual Expendituret=7=7,200 (1+0.07)^{7}=USD11,562

Annual Expendituret=8=7,200 (1+0.07)^{8}=USD12,371

Annual Expendituret=9=7,200 (1+0.07)^{9}=USD13,237

Annual Expendituret=10=7,200 (1+0.07)^{10}=USD14,163

Step 2: Find the present value of annual expenditures at t = 5

Time Period **Annual Expenditure (USD)****Present Value** 6 10,805 10,805 (1.08)^{-1 }=10,004 7 11,562 11,562 (1.08)^{-2 }=9,912.5 8 12,371 12,371 (1.08)^{-3 }=9,820.5 9 13,237 13,237 (1.08)^{-4 }=9,729.6 10 14,163 14,163 (1.08)^{-5 }=9,639 SUM = USD 49,106

Step 3: Find the annuity payment

N = 5, %i = 8, PV = 0, FV = 49,106, CPT PMT.

PMT = 8,370.

A USD8,370. B USD8,539. C

USD8,730.