Leslie McCormack is in the spring quarter of her freshman year of college. She a

Question

Leslie McCormack is in the spring quarter of her freshman year of college. She and her friends already are planning a trip to Europe after graduation in a little over three years. Leslie would like to contribute to a savings account over the next three years in order to accumulate enough money to take the trip. Assume an interest rate of 22%, compounded quarterly. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) How much will Leslie accumulate in three years by depositing $580 at the beginning of each of the next 12 quarters?

Explanation / Answer

Interest rate : 22%

i.e., Interest is paid for 12 periods at 5.5%

(22% is for full year and it is given that interest will be compunded quarterly, so 22/4 = 5.5% )

Future value of annuity = principal * {(1+r)n -1 / r }

Future value of annuity is calculated to know the value at future date for a series of periodic payments.

Principal amount = $ 580

(1+r)n = (1+0.055)whole power 12 = 1.9012

FVA = 580*(1.9012-1/0.55)

= 580*16.385

= $ 9503

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