Liliana Alvarez%u2019s employer offers its workers a two-month paid sabbatical e

Question

Liliana Alvarez%u2019s employer offers its workers a two-month paid sabbatical every seven years. Liliana, who just started working for the firm, plans to spend her sabbatical touring Europe at an estimated cost of $25,000. To finance her trip, Liliana plans to make six annual end-of-year deposits of $2,500 each, starting this year, into an investment account earning 8% interest.
a. Will Liliana%u2019s account balance at the end of seven years be enough to pay for her trip?
b. Suppose Liliana increases her annual contribution to $3,150, How large will her account balance be at the end of seven years?

Explanation / Answer

a. Will Liliana%u2019s account balance at the end of seven years be enough to pay for her trip?

Account balance at the end of seven years:2500*(1+8%)^6+2500*(1+8%)^5+2500*(1+8%)^4+2500*(1+8%)^3+2500*(1+8%)^2+2500*(1+8%)^1=$19807

which is not sufficient to inance her trip, beacuse it's estimated cost was $25,000

b. Suppose Liliana increases her annual contribution to $3,150, How large will her account balance be at the end of seven years?

Account balance at the end of seven years:3150*(1+8%)^6+3150*(1+8%)^5+3150*(1+8%)^4+3150*(1+8%)^3+3150*(1+8%)^2+3150*(1+8%)^1=$24956.8

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