Question

Fred Buffett (Warren's younger brother) started his account with the investment of an inheritance from his grandmother of $16,250, it was generating 4.75% per year, compounded annually. That was over 12 years ago, but today he found an equally safe account (with a tip from his cousin Jimmy Buffett) where he will more than double his interest rate to 9.65% per year. Fred pulled all his money out of the old account and placed it in this new account. He plans to leave the funds alone for another 20 years, at which time he plans to go on a dream cruise. At that time, how much should Fred expect to have in the account?

Please be very thorough with work shown and provide the specific formula used.

Answer 1

Value 12 years ago from Grandmother inheritance = 16,250

Now we will calculate the present value of 16,250 which was invested 12 years ago at a rate of 4.75%

Value of 16,250 = 16,250 * (1 + 4.75%)¹²

Value of 16,250 = 28,359.71

Now we will calculate fuure value of Value of 28,359.71 after 20 years at rate of 9.65%

Future value of 28,359.71 = 28,359.71 * (1 + 9.65%)²⁰

Future value of 28,359.71 = 179,008.83

After 20 years he will expect to have 179,008.83 in his account for dream cruise.