Question

sarah Jones wants to deposit $2,000 per year into an account earning 4 percent for the next 3 years, so she can purchase a used car at that time. What type of computation would she use to determine the amount she will have accumulated for this purchase?

Answer 1

Answer:

Compounding formula would be used here which is as under:

Future Value = Present value * (1+r)^n

FV = (PV is $2000) *  ( 1 + 4%)^ 3 number of years

Remember that r is the return that is 4% that Sarah Jones will receive.

So

FV = $2250

So this is the amount that she will receive after three years. I would recommend her to invest in ordinary shares (take higher risk for higher return) so that she is able to buy a better car.