1. You are paying into a mutual fund that earns 6% compound interest. If you are
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Question
1. You are paying into a mutual fund that earns 6% compound interest. If you are making an annual contribution of $10,000, how much will be in the funds in 20 years?
2. You want to save money from your business operation to replace a truck that has been used in delivery. The truck will be replaced after 10 years from now and the replacement cost would be about $50,000. If you earn 6% interest on your savings, how much must you deposit at the end of each year to meet the needs?
Can you solve those questions above. Thank you!
Explanation / Answer
1)Amount received after 20 years if compounded annually = (Assuming investment is made at beginning of year)
10000(1+.06)^20+10000(1+.06)^19+10000(1.06)^18+10000(1+.06)^17+10000(1+.06)^16 +10000(1+.06)^16 +..........10000(1+.06)^3+10000(1+.06)^2 +10000(1+.06)
From future value annuity table you will get the values of
=FVAF@20years,6%[from future value annuity table]= 38.99273*10000
= $ 389,927.30
**you can also assume If investment is made in arrears( at the end of period) [from Future value annuity table]=36.78559*10000 = $367,855.90
2)Suppose you invest X" amount of money at end of each year FOR10 years
= FVAF @6%,10years *X= 50000
=13.18079*X = 50000
X= 50000/13.18079
X(Amount to be invested at the end of each year) = $3793.40 per annum (Approx 3800 per annum)
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