Question

Suppose if, instead of depositing the $600 all at once, you deposit nothing at the beginning and you divide up the $600 into 12 envelopes each with $50. Find the balance after one year if you deposit one $50 envelope each month, all year, into an account that pays 5% APR with monthly compounding.

Answer 1

The balance after one year if you deposit one $50 envelope each month, all year is  $613.95.

What is the balance after one year?

The balance after 1 year can be determined using this formula:

Amount deposited monthly x annuity factor

Annuity factor = {[(1+r)^n] - 1} / r

Where:

• r = interest rate = 5% /12 = 0.417%
• n = number of years = 1 x 12 = 12

Annuity factor = 1.004167^12 - 1 / 0.00417 = 12.279082

Balance = 12.279082 x 50 = $613.95

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