Question

Wynn is 24 years old and has decided to reduce the number of cups of coffee he buys by 2 cups per day. One cup of coffee typically costs $2.50. Assuming 30 days in a month, if he chooses to invest this money at the end of every 6 months into an investment paying 5.50% compounded semi-annually, how much will he have when he turns 69?

Answer 1

The total amount he would have at 69 is $343,347.81.

What is the total amount saved?

The formula that can be used to determine the future value of the deferred annuity is:

Future value = annuity factor x monthly deposit

Annuity factor = {[(1+r)^n] - 1} / r

Where:

• r = interest rate = 5.5 /2 = 2.75%
• n = number of payments = 2 x (69 - 24) = 90

Amount he would save every 6 months:

• amount saved per day = $2.50 x 2 = $5
• Amount saved per month : $5 x 30 = $150
• Amount saved every 6 months = $150 x 6 = $900

Future value : 900 x {[(1.0275^90) - 1] / 0.275}= $343,347.81

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