Question

You are planning to make monthly deposits of $50 into a retirement account that pays 10 percent interest compounded monthly. If your first deposit will be made one month from now, how large will your retirement account be in 18 years?

Multiple Choice

• $31,529.57

• $360,337.93

• $30,028.16

• $27,359.50

• $28,526.75

Answer 1

The amount will be as follows:

Future value = Monthly deposits x [ [ (1 + r)ⁿ – 1 ] / r ]

r will be as follows:

= 10% / 12 (Because the interest is compounded monthly, hence divided by 12)

= 0.833333333% or 0.00833333333

n is computed as follows:

= 18 x 12 (Because the interest is compounded monthly, hence multiplied by 12)

= 216

So, the amount will be as follows:

= $ 50 x [ [ (1 + 0.0083333333)²¹⁶ - 1 ] / 0.0083333333 ]

= $ 50 x 600.5631886

= $ 30,028.16 Approximately