As part of your personal budgeting process, you have determined that in each of the next 5 years you will have budget shortfalls. In other words, you will need the amounts shown in the following table at the end of the given year to balance your budget—that is, to make inflows equal outflows. You expect to be able to earn 8% on your investments during the next 5 years and wish to fund the budget shortfalls over the next 5 years with a single amount.
End of year Budget shortfall
1 ............. $ 5,000
2 ............. 4,000
3 ............. 6,000
4 ............. 10,000
5 ............. 3,000
a. How large must the single deposit today into an account paying 8% annual interest be to provide for full coverage of the anticipated budget shortfalls?
b. What effect would an increase in your earnings rate have on the amount calculated in part a? Explain.