Got confused by the solution step (iv.)…can someone please explain =(
Rubik, It’s a bit hard to answer without you being more specific, as there are multiple steps, but I’ll give it a shot, and I’ll assume you followed everything up to step IV. In step IV the calculated payments are discounted back and then summed to find their “present value” as of year 17. So, from the perspective of year 17, the present value of the required payments is $62,677. This is now your target. The couple wants to make 17 equal payments (which is an annuity) to get to this target value of $62,677, so at this point, you’ll want to treat this as an annuity problem and solve for the payments they’ll need to make to get there. Probably not the cleanest explanation, but I’m trying to say it differently than they do in the book. You may also find it useful to look at the number line in step III… you can see that they have discounted the payments back to year 17 (though they did not type the 62,677 figure there) and now need to come up with an annual payment that would get them there from year 0. This is actually a really good problem in terms of being a concept tester.
I appreciate it- so using the additive priciple, we take the PV of the calculated (FV-technically speaking from step previous) and just sum them… Thank you very much1 I will be more concise in my questions next time. =)