A student working part time thinks that she will be able to deposit $4,000 at th
ID: 2732118 • Letter: A
Question
A student working part time thinks that she will be able to deposit $4,000 at the end of each of the next three years into her bank account paying 8% interest per annum compound. She currently has $7,000 in the account. a) How much money will be in her account at the end of each of the next three years? b) Assuming that she does not make any further deposits after three years, how much will be in the account at the end of four years? c) What is the present value of the account balance calculated in part b? (Assume a discount rate of 9% per annum compound). d) At the end of four years she withdraws $12,000 from her account to buy a car. How much will be in the account at the end of five ye
Explanation / Answer
a) At the end of 1st year = 7,000 (1+0.08) + 4,000 = $11,560
At the end of 2nd year = 7,000 (1+0.08)2 + 4,000 (1+0.08) + 4,000 = $16,484.80
At the end of 3rd year = 7,000 (1+0.08)3 + 4,000 (1+0.08)2 + 4,000 (1+0.08) + 4,000 = $21,803.58
b) At the end of 4th year = $21,803.58 (1 +0.08) = $23,547.87
c) PV = FV / (1+R)t = $23,547.87 / (1.09)4 = $16,681.90
d) New Balance after 4 year = $23,547.87 - $12,000 = $11,547.87
Balance at the end of 5 years = $11,547.87 (1..08) = $12,471.70
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