Question

Future Value of Annuity. Michelle is attending college and has a part-time job. Once she finishes college, Michelle would like to relocate to a metropolitan area. She wants to build her savings so that she will have a “nest egg” to start her off. Michelle works out her budget and decides she can afford to set aside $50 per month for savings. Her bank will pay her 3% on her savings account. What will Michelle’s balance be in five years?

Answer 1

Answer:-

The balance in Michelle's account after 5 years is calculated using Future value of annuity.

The formula for future value of annuity is given by:-

  

Where,

PMT is the periodic payment

i is the interest rate

n is the number of years

m is the compounding frequency in year ( Here, the payment is on monthly basis so m = 12)

The following informations are given in the question:-

PMT = $ 50

i = 3% = 0.05

n = 5

m = 12

Future Value of Annuity =

=

= $ 3,232

Hence, the balance in Michelle's account after 5 years is $ 3,232