Question

Assume a person saves $60 a month by using coupons and doing comparison shopping. a. What is the amount of annual savings? Annual savings amount $ 720 b. What would be the future value of this annual amount over 8 years, assuming an interest rate of 5 percent? Use Exhibit 1-B. (Round time value factor to 3 decimal places and final answer to 2 decimal places.)

Answer 1

Answer:

a) For this case we know that the person saves 60 per month and in a year can save:

$60*12= 720$

b) For this case we can use the formula for the compound interest given by:

$A= P(1+ \frac{r}{n})^{nt}$

Where:

A= represent the future value

P=720 the present value

i= 5% =0.05 the interest rate

n=1 the number of times that the interest is effective in a year

t= 8 represent the number of years

And after replace we got:

$A= 720 (1+0.05)^{8*1} =1063.77$

So the future value of this annual amount would be 1063.77

Explanation:

Part a

For this case we know that the person saves 60 per month and in a year can save:

$60*12= 720$

Part b

For this case we can use the formula for the compound interest given by:

$A= P(1+ \frac{r}{n})^{nt}$

Where:

A= represent the future value

P=720 the present value

i= 5% =0.05 the interest rate

n=1 the number of times that the interest is effective in a year

t= 8 represent the number of years

And after replace we got:

$A= 720 (1+0.05)^{8*1} =1063.77$

So the future value of this annual amount would be 1063.77