Question

You just received a $5,000 gift from your grandmother which you have decided to save and then gift to your grandchildren 50 years from now. How much additional money will you gift if you earn 7.5 percent interest rather than 7 percent interest over the next 50 years?

Answer 1

Answer: Difference = $185,948.5 - $147,285. = $38,663.5

Explanation:

To calculate the future value,  you have to use the formula

fv = PA (1 + r/100)ⁿ

where

FV = future value

PA = Present Amount

r = rate

n = number of years

calculating for the future value if you earn a percent of 7.5 =

fv = 5,000 (1 + 0.075) ⁵⁰

fv = 5,000 ( 1.075)⁵⁰

fv = 5,000 (37.1897)

fv = 185,948.5  

calculating the Fv when the rate is 7%

fv = 5,000 (1 + 0.070) ⁵⁰

fv = 5,000 ( 1.070)⁵⁰

fv = 5,000 (29.4570)

fv = 147,285

Then find the difference between the Fv when the rate is 7.5 and when the rate is 7

Therefore difference = $185,948.5 - $147,285. = $38,663.5