Question

It is likely that airplane tickets will be increased by 5% each year for the next four years. The cost of the plane ticket to Destination A at the end of the first year is $200. How much money should be placed in a savings account now to have enough money to pay for one travel per year for the next four years

Answer 1

Answer:

The amount to save now is = $862.03 (to 2 decimal places)

Explanation:

In order to solve this, we will compute the end-of-year amounts using the 5% increase each year. This is done as follows:

Year 1 ending = $200

Year 2:

Year 2 beginning price = $200

Note that 5% increase = 5/100 = 0.05

increase in year 2 = 5% of 200 = 0.05 × 200 = 10

Year 2 new price = 200 + 10 = $210

Year 3:

beginning price = $210

increase in year 3 = 0.05 × 210 = $10.5

Year 3 new price = 210 + 10.5 = $220.5

Year 4

beginning price = $220.5

interest in year 4 = 0.05 × 220.5 = 11.025

new price in year 4 = 220.5 + 11.025 = $231.525

Next to calculate the amount needed to pay for one travel ticket per year for the next four years, we will add the prices of the tickets each year as follows:

Total amounts needed = 200 +210 + 220.50 + 231.53 = $862.03