Question

You want to go to Europe 5 years from now, and you can save $7,300 per year, beginning one year from today. You plan to deposit the funds in a mutual fund that you think will return 8.5% per year. Under these conditions, how much would you have just after you make the 5th deposit, 5 years from now? a. $50,608.61

Answer 1

Answer: Amount after making the 5th deposit will be $43,255.22

Explanation:

THE PROBLEM ABOVE CAN BE SOLVED BY CALCULATING THE FUTURE VALUE OF ANNUITY.

GIVEN :

Periodic payment(P) = $7,300

Period(n) = 5 years

Interest rate(r) =8.5% = 0.085

Future Value (FV) =?

FV of annuity=P{[(1+r)^(n) - 1]/r}

FV = $7,300 { [ (1 + 0.085)^(5) -1] ÷ 0.085}

FV = $7,300 { [ (1.085^5) - 1] ÷ 0.085}

FV = $7,300 {0.503656690178125 ÷ 0.085}

FV = $7,300 × 5.925372825625

FV = $43,255.22

Amount after making the 5th deposit will be $43,255.22

Answer 2

Answer:

$36,602.5

Explanation:

Your profit each year of saving $7,300 at 8.5% return each year is $620.5

In that case you earn $7,920.5 each. Multiply by 5 years which is the fifth year you made the last deposit, and you will arrive at $36,602.5