Question

16. Billy thinks he can save enough to deposit $1,200 in the bank at the end of each year for the next 30 years. How much will he have if the bank pays 6% interest, compounded annually? a. None of the below b. $84,870.82 c. $74,870.82 d. $84,870.82 e. $94,869.82

Answer 1

Formula for future value of ordinary annuity is:

FV = P x [(1+r)ⁿ- 1 /r]

FV = Future value of annuity

P = Periodic Payment = $ 1,200

r = Rate per period = 6 % or 0.06

n = Numbers of periods = 30

FV = $ 1,200 x [(1 + 0.06)³⁰ – 1/0.06]

     = $ 1,200 x [(1.06)³⁰ – 1/0.06]

    = $ 1,200 x [(5.743491173 – 1)/0.06]

     = $ 1,200 x (4.743491173/0.06)

     = $ 1,200 x 79.05818622

     = $ 94,869.82346 or $ 94,869.82

Hence option “e. $ 94,869.82” is correct answer.