Question

You have decided to save for a new car 6 years from now and you expect to be paying $40,000 for the car at that time. You will deposit money into your bank account which will earn 3% compounded annually. How much do you need to save each year (at year-end) to have the $40,000 if your first deposit is made one year from now and your final deposit is made at the time you purchase your car?

Answer 1

Required Future Value at end of 6 years=$40000

Interest rate per year (i) =3%

Years (n)= 6

Amount is Paid at end of year. So it is ordinary Annuity. Below Formula will be used.

Amount required to save each month = Future value*i/(((1+i)^n)-1)  
  
40000*3%/(((1+3%)^6)-1)  

=$6183.90

So Amount Required to be saved each year is 6183.90