Question

3) (30 pts) A young man followed the advice of his Dad and started saving some money directly from every monthly paycheck where he put $175 into the bank. If the bank was giving him 4% annual interest, how much money will the young man have after 40 years of working? a) (10 pts) Draw the cash flow diagram. b) (20 pts) What will be the future amount of money in his bank account?

Answer 1

i = 4%= 4% / 12 = 0.3333% per month

t = 40 * 12 = 480 months

Future amount = 175 * (F/A, 0.3333%, 480)

= 175 * ((1 + 0.003333)^480-1)/0.003333

= 175 * ((1.003333)^480-1)/0.003333

= 175 * 1181.843217

= 206822.56

CFD

Future worth = 206822 i = 0.3333% per month Payment of 175 every month for 480 months (40 yrs)