Question

Lauren plans to deposit $5000 into a bank account at the beginning of next month and $175/month into the same account at the end of that month and at the end of each subsequent month for the next 3 years. If her bank pays interest at a rate of 3%/year compounded monthly, how much will Lauren have in her account at the end of 3 years

Answer 1

Answer:

$12,053.86

Explanation:

The easiest way to calculate this is using an excel spreadsheet and the future value function. Using the FV function =FV(rate,nper,pmt)

• rate = 3%/12 = 0.25%
• nper = 36
• pmt = 175

This function will give us the future value of the annuity =FV(0.25%,36,175) = $6,583.60

Now we must add the future value of the original $5,000:

future value = $5,000 x (1 + 0.0025)³⁶ = $5,470.26

total future value = $6,583.60 + $5,470.26 = $12,053.86

if you do not want to use an excel spreadsheet, you can use the following formula:

F = P x ([1 + r]ⁿ - 1 )/r

F = 175 x [(1 + 0.0025)³⁶ - 1] / 0.0025 = $6,583.60

the answer will be the same