Question

You just won a lottery prize of $95,000. While you plan to use some of the sum to pay off your student loans, you would like to have a total of $100,000 saved in an account in 8 years. After paying off some of the principal on your student loans, you plan to deposit the money left over in an account earning 2% interest, compounded annually. How much money can you spend today and still achieve your goal of having $100,000 at the end of 8 years?

Answer 1

Answer:

Principal Amount needed to get $100000 at end of 8 years = $ 85470

Prospective Spending out of $ 95000 prize = $9530  

Explanation:

Compound Interest Total Amount formula with Principal & 'n' period of times, compounding 't' times in a time period n.

A = P [1 + r/n] ^ nt

100,000 = P [1+ 0.02 / 1] ^ (8x1)

100,000 = P [(1.02)^ 8]

100,000 = P [1.17]

P = 100,000 / 1.17

P = $ 85470  [Principal Amount needed to get $100000 at end of 8 years]

Prospective Spending  = Prize Amount - Principal amount needed

95000 - 85470

= $ 9530

Answer 2

You put 85,000 into your account for 8 years and add $1250 each year into your account. At the end of the 8 years you will have a 11