Jim is in the market for a car that will last for the next 10 years and has saved up some money for the purpose of a car. What’s
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Answer:
(a) No, there is a Shortfall = $2,965
(b) $25,202.95
Explanation:
As provided current balance: $15,000
Current return on investment = 8%
Assumed this is compound interest as no amount is withdrawn in between.
Therefore, future value of $1 after 5 years @ 8% compounded per year =
1.469
Value of $15,000 on the date of 40th Birthday = $15,000 1.469 = $22,035
There is a shortfall in the budgeted amount = $25,000 - $22,035 = $2,965
If $500 annual contributions are made in the same account then value shall be:
Value of $15,000 = $22,035
Value of $500 = Value of $1 after 5 years = $6.3359
= $500 6.3359 = $3,167.95
Then total balance in account = $22,035 + $3,167.95 = $25,202.95