Question

Chris plans on saving $4,000 a year at 4 percent interest for five years. Which one of these is the correct formula for computing the future value at Year 5 of these savings? Assume the payments occur at the end of each year. Click the answer you think is right. FVA $4,000 x [(1.04-1)10.04] FVA $4,000 x [(1.04-1)/0.04 FVA $4.000 x 1.04 FVA, $4,000 x [(1.04 -1/.04] x (1.04)

Answer 1

Answer: Closest answer is: FVA $4,000 x [(1.04-1)/0.04

Explanation:

Because the deposit is constant and occurs every period, it is an annuity.

The formula for the future value of an annuity is:

= Annuity * ( (1 + rate)^number of periods - 1) / rate

Correct formula is therefore:

= 4,000 * ( ( 1 + 4%)⁵ - 1)  4%+

= 4,000 * ( 1.04⁵ - 1 ) / 0.04

Closest answer is: FVA $4,000 x [(1.04-1)/0.04