You begin an investment plan by putting $10,000 in an account that you assume wi

Question

You begin an investment plan by putting $10,000 in an account that you assume will earn 8% annually.For the next 25 years, you add $5000/yr.In anticipation of buying a house with a 15-year mortgage, you expect to need a one-time down payment of $55,000 at the end of year 8.You anticipate being able to make the monthly mortgage payment without affecting the yearly contribution to the savings plan.

Draw a cash flow diagram for this situation.

Will you have the down payment at the end of year 8?

What will be the value of your savings account at the end of year 25?

Explanation / Answer

Value of Savings Account at the end of year 25

Annual Interest rate = 8%

Yearly investment = $5000/yr

Value of savings Account =5000x[1+0.08]^(25)-1/0.08

=$365529.7

Total Value of savings Account at the end of 25 years = 365529.7+10000 = $375529.70

Annual Savings at the end of Year 8

5000x[1+0.08]^(8)-1/0.08

=$53183.13

by adding $10000 initial Investment, Total Savings = 53183.13+10000 = $54183.13

He will be short of $55000 down payment by 55000 - 54183.13 =$816.87

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