Question

You are saving to buy a speed boat. Starting today, you will put $1,000 into an investment account. Each month thereafter, your contribution will be .1% (.001) higher than the month before, so that your contribution next month will be .1% higher than today, and so forth and so on. The investment account has a periodic monthly interest rate of .4% (.004). Ignore taxes. You will make contributions until 5 years from today.
At the end of five years, when you put in your last ­contribution, how much will you have saved?

Answer 1

Answer:

You will have saved $69,612 after five years.

Step-by-step explanation:

This can be calculated using the for formula for calculating the future value of a growing annuity as follows:

FV = C * (((1 + r)^n - (1 + g)^n) / (r - g)) ……………………………………… (1)

Where;

FW = future value or amount you will have saved after five years = ?

C = first deposit = $1,000

r = periodic monthly interest rate of = 0.4%, or 0.004

g = growth rate of contribution = 0.1%, or 0.001

n = number of months = 5 years * 12 = 60

Substituting all the values into equation (1), we have:

FV = $1,000 * (((1 + 0.004)^60 - (1 + 0.001)^60) / (0.004 - 0.001))

FV = $1,000 * 69.612001854052

FV = $69,612.00

Therefore, you will have saved $69,612 after five years.