Question

You want $5000 4 years from nowfor a down payment for a car. How much money must be deposited monetly into an account earning 4.2% compounded monthly to achieve this goal?

Answer 1

Answer:

$95.5090 must be deposited monthly

Step-by-step explanation:

From the information given:

The annual interest rate (r) = 4.2% = 0.042

Let assume that an amount Y is deposited, then after one month, it will increase to:

$Y ( 1+ \dfrac{0.042}{12})$

The total amount after 4 years will be:

$= Y ( 1+ \dfrac{0.042}{12})^{48}+Y ( 1+ \dfrac{0.042}{12})^{47} +Y ( 1+ \dfrac{0.042}{12})^{46} +...+ Y ( 1+ \dfrac{0.042}{12})$

$= Y ( 1.0035)^{48}+Y ( 1.0035)^{47} +Y( 1.0035)^{46} +...+ Y( 1.0035)$

Using the sum of a geometric progression:

$= Y (1.0035) \dfrac{ (1.0035^{48}-1)}{(1.0035-1)}$

$= Y (1.0035) \dfrac{ (1.0035^{48}-1)}{0.0035}$

The above amount is then equal to $5000

i.e

$= Y (1.0035) \dfrac{ (1.0035^{48}-1)}{0.0035} = 5000$

$Y = \dfrac{5000\times 0.0035}{(1.0035)(1.0035^{48}-1)} \\ \\ \mathbf{Y = \ 95.5090}$