Question

Bridgette's grandparents opened a savings account for her and placed $700 in the account. The account pays 3.5% interest. Bridgette wants to be a singer and she has her heart set on a new karaoke machine. The machine costs $200. How much less will the account be worth in terms of future value in 8 years if she buys the karaoke machine now versus leaving the account untouched?

• A. $200
• B. $151.88
• C. $658.40
• D. $263.36

Answer 1

Solution

Future value=Initial investment*(1+r)^n

Here

r=intrest rate=3.5%

n-number of periods=8

If she leaves her account untouched

Initial investment=700

Thus

Future value=700*(1+.035)^8=921.766

If she buys the karaoke machine

Her initial investment will be reduced by 200.Thus initial investment will be 700-200=500

Thus

Future value=500*(1+.035)^8=658.405

Thus the diffence in the amount in the acount afte 8 years if she bus the karaoke vs she lets the account untouched=921.766-658.405=263.361

Thus the correct answer is $263.36

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