Question

Max invests a fixed percentage of his salary at the end of each year. He started this year with $2,000. For the next 9 years he expects his salary to increase by 5% annually and he plans to increase his investment by the same rate. How much will the investment be worth after 10 years of investment if the interest rate is 7% per year? Please use compound interest tables to find your answer

Answer 1

ANSWER:

Savings = $2,000

increase in savings per year = 5% of savings = 5% * 2000 = $100

i = 7%

n = 10 years

so in order to find the future worth of this investment we will 1st find the pw

pw = savings(p/a,i,n) + increase in savings per year(p/g,i,n)

pw = $2,000(p/a,7%,10) + 100(p/g,7%,10)

pw = 2,000 * 7.024 + 100 * 27.716

pw = $14,048 + $2,771.6

pw = $16,819.6

fw = pw * (1+r) ^ n

fw = 16,819.6 * (1 + 7%) ^ 10

fw = 16,819.6 * (1.07) ^ 10

fw = 16,819.6 * 1.9671

fw = $33,086.69

hence the value of investment after 10 years is $33,086.69