On January 1, year 1, Beal Corporation adopted a plan to accumulate funds for a new plant building to be erected beginning July 1, year 6, at an estimated cost of $1,200,000.

 On January 1, year 1, Beal Corporation adopted a plan to accumulate funds for a new plant building to be erected beginning July 1, year 6, at an estimated cost of $1,200,000.  Beal intends to make five equal annual deposits in a fund that will earn interest at 8% compounded annually.  The first deposit is made on July 1, year 1.  Present value and future amount factors are as follows:



Present value of 1 at 8% for 5 periods    0.68
Present value of 1 at 8% for 6 periods    0.63
Future amount of ordinary annuity of 1 at 8% for 5 periods    5.87
Future amount of annuity in advance of 1 at 8% for 5 periods    6.34


Beal should make five annual deposits (rounded) of
$151,200
$163,200
$189,300 Correct
$204,400
 You Answered Correctly!
This answer is correct.  The desired fund balance on July 1, year 6 ($1,200,000) is a future amount.  The series of five equal annual deposits is an annuity in advance.  Whether this is an ordinary annuity or an annuity in advance can be determined by looking at the last deposit.  The last deposit (7/1/Y5)) is made one year prior to the date the future amount is needed.  Therefore, these are beginning-of-year payments, and this is an annuity in advance.  The deposit amount is computed below.



           Future amount

           F.A. factor    =    $1,200,000

     6.34    =    $189,274