Ted owns a small florist shop. Since his business is booming, his realizes he will soon need one more delivery van. He decides he will purchase a full size van versus a minivan, which he currently owns. The van he is looking to buy in 3 years will cost him $40,000. How much should he invest each quarter into an account that pays 7% per year compounded quarterly, so that he can have the desired funds in 7 years?

He must deposit $1,119.26 per quarter for 7 years.

Explanation:

Giving the following information:

Future value = $40,000

Number of years = 7

Interest rate = 7% compounded quarterly.

First, we need to determine the real interest rate:

Real interest rate = 0.07/4 = 0.0175

Now, using the following formula, we can calculate the investment required quarterly:

FV = {A*[ (1+i) ^n-1]}/i

A = deposit

Isolating A:

A = (FV*i) / {[ (1+i) ^n]-1}

A = (40,000*0.0175) / [ (1.0175^28) - 1]

A = $1,119.26

He must deposit $1,119.26 per quarter for 7 years.