Question

Lauren plans to deposit $6000 into a bank account at the beginning of next month and $175/month into the same account at the end of that month and at the end of each subsequent month for the next 7 years. If her bank pays interest at a rate of 6%/year compounded monthly, how much will Lauren have in her account at the end of 7 years? (Assume she makes no withdrawals during the 7-year period. Round your answer to the nearest cent.)

Answer 1

The future value of $6000 deposited next month at the end of 7 years

We use excel function FV for this => FV(0.06/12,85,0,6000)

Rate = 0.06/12 ( Since rate is compounded monthly)

nper = 85 (Since there are 12*7 = 84 monthly periods + 1 period since $6000 is deposited at start of the month)

PMT = 0 (Since this is one time payment)

PV = -6000

we get FV = $9167.83

The future value of $175 monthly payment deposited starting next month-end for 7 years

We use excel function FV for this => FV(0.06/12,84,-175,0)

Rate = 0.06/12 ( Since rate is compounded monthly)

nper = 84 (Since there are 12*7 = 84 monthly periods)

PMT = -175 (Since this is recurring monthly payment)

PV = 0

we get FV = $18212.94

Total amount after 7 years = $9167.83 + $18212.94

Lauren amount in her account at the end of 7 years = $27,380.77