Ben is saving to go on a South Pacific cruise four years from today. The trip wi

Question

Ben is saving to go on a South Pacific cruise four years from today. The trip will cost $10,000.  To fund the trip he has decided to put his annual bonus into an account that will earn 6% interest compounded annually.  According to his calculations his first bonus (to be received at the end of the year) will be $1,000. His second bonus (to be received 2 years from today) will be $2,000 and his third bonus (3 years from today) will be $3,000.  

a) How much will Ben have saved by the end of year 4?

b) How much will he need to deposit TODAY in order to have enough for the trip?

Explanation / Answer

a) Future value of savings by the end of year 4 = 1,000*1.06^3 + 2,000*1.06^2 + 1,000*1.06^1 =$4498.22

b) Let the deposit today be x

10,000 = x*1.06^4 =

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