Question

You are interested in saving money for your first house.  Your plan is to make regular deposits into a brokerage account which will earn 14 percent. Your first deposit of $5,000 will be made today.  You also plan to make four additional deposits at the beginning of each of the next four years.  Your plan is to increase your deposits by 10 percent a year.  (That is, you plan to deposit $5,500 at t = 1, and $6,050 at
t = 2, etc.)  How much money will be in your account after five years?

a.   $24,697.40

b.   $30,525.00

c.   $32,485.98

d.   $39,362.57

e.   $44,873.90

Show work.

Answer 1

Last period=	5
Compounding rate	14.000%
Year	0	1	2	3	4
Cash flow stream	5000	5500	6050	6655	7320.5
Compounding factor	1.925	1.689	1.482	1.300	1.140
Compounded cash flows	9627.073	9289.281	8963.341	8648.838	8345.370
FV = Sum of compounded cash flows
FV=	44873.90
Where
Compunding factor =	(1 + rate)^(Last period-Corresponding period in years)
Compounded Cashflow=	Cash flow stream*compounding factor