Question

1. A student wants to have $40,000 when he graduates 4 years from now. His grandfather gave him a gift of $15,000. How much must he save each year (to the nearest dollar) if he deposits the $15,000 today and can earn 11% on both the $15,000 and his savings?

	A.	$  3858
	B.	$  3658
	C.	$  3558
	D.	$  3758

Answer 1

Interest rate = 14%

Duration of the investment = 4 years

From the compound interest factor table, we obtain

(F/P, 11%, 4) = 1.518

(F/A, 11%, 4) = 4.710

Let the required yearly savings be 'S'

Future worth of the given investment = $15,000(F/P, 11%, 4) + S(F/A, 11%, 4) = $15,000*1.518 + S*4.710 = 22,770 + 4.71S

Required future worth = $40,000

=> 22770 + 4.71S = 40000

=> 4.71S = 17230

=> S = 17230/4.71

S = 3658

Required annual savings = $3,658

Ans: B. $3658