Description of future value of annuity

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Reference no: EM1330608

For Bill's tuition expenses, his rich uncle has agreed to loan him $8,000 as he begins college, and increase it by $2,000 for the remaining 3 years (amounts $10,000, $12,000 and $14,000). Being a businessman, his uncle would at least like to have 5% on his money. Bill is to begin paying back the amount immediately after graduating, in the best possible way.

Bill finds a part time job in his final year and pays $5,000 to his uncle at the end of the 4th year. On graduating Bill finds a full time job and gets married. As a result he is able to pay only $2,000 at the end of the fifth year to his uncle. His uncle is upset that Bill is not making every effort to pay his loan, and wants to get back his money in the next four years. What equal payment per year should he demand from Bill to get back his entire amount in the next four years? (Hint: create a cash flow diagram for amounts mentioned, and calculate the FV for year 5. Next, calculate the AW which is equivalent to the calculated FV at 5% over 4 years).

Reference no: EM1330608

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