Jay Coleman just graduated. He plans to work for five years and then leave for t

Question

Jay Coleman just graduated. He plans to work for five years and then leave for the Australian "Outback" country. He figures that he can save $3,500 a year for the first three years and $5,000 a year for the next two years. These savings will start one year from now. In addition, his family gave him a $2,500 graduation gift. If he puts the gift, and the future savings when they start, into an account that pays 7.75% compounded annually, what will his financial "stake" be when he leaves for Australia five years from now'? Round off to the nearest $1.

Explanation / Answer

Amount at the end of 5 year = Initial Deposit*(1+r)^5 + Annual Cash flow for 1st 3 year*((1+r)^3 - 1)/r *(1+r)^2 + Annual Cash flow for remaining 2 year*((1+r)^2 - 1)/r

Amount at the end of 5 year = 2500*(1+7.75%)^5 + 3500*((1+7.75%)^3 -1)/7.75% * (1+7.75%)^2 + 5000*((1+7.75%)^2 -1)/7.75%

Amount at the end of 5 year = $ 27,178

Answer

$ 27,178

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