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

Answer 1.

Amount Invested for 18 years = $20,000
Annual Interest Rate = 6%

Accumulated Sum after 18 years = $20,000 * (1 + 0.06)^18
Accumulated Sum after 18 years = $20,000 * 1.06^18
Accumulated Sum after 18 years = $57,086.80

So, Millionaires can withdraw $57,086.80 after 18 years

Answer 2.

Annual Deposit for 4 years = $2,500
Annual Interest Rate = 6%

Accumulated Sum after 4 years = $2,500*1.06^3 + $2,500*1.06^2 + $2,500*1.06 + $2,500
Accumulated Sum after 4 years = $2,500 * (1.06^4 - 1) / 0.06
Accumulated Sum after 4 years = $10,936.55

So, there will be $10,936.55 in the auto fund after 4 years

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