Mr. and Mrs. Millionaire invesed $20,000 in a bank account that pays 6% interest

Question

Mr. and Mrs. Millionaire invesed $20,000 in a bank account that pays 6% interest when their daughter Penny was born. The money will be used for Penny's college education. The Millionaires withdraw the money from the bank 18 years later (18 periods). How much will they withdraw? A) $57,086.80 B) $28,370.40 C) $70,068.80 D) $157,086.80 Mr. and Mrs. Dealer will invest $2,500 in a bank account at the end of each year for 4 years for their son Mercedes in order to purchase a car. The account will earn 6% interest compounded annually. How much will be in the auto fund (4 periods) later? A) $16,582.45 B) $10,936.55 C) $10,000.00 D) 8,662.78

Explanation / Answer

1.

FV = PV × (1+interest rate)number of years

FV = $20,000 × (1+ 6%)18 years

FV = $20,000 × 2.85434

FV = $57,086.8

Hence, Mr and Mrs. Millionaire will withdraw $57,086.8 after 18 years.

2.

FVA = Cash flow at the end of each period × (((1+interest rate)number of years - 1) / interest rate)

FVA = $2,500 × (((1+6%)4 years - 1) / 6%)

FVA = $2,500 × 4.374616

FVA = $10,936.55

Hence, Mr and Mrs. Millionaire will have $10.936.55 in his auto fund after 4 years.

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