Question

Dover Company deposits $30,000 with Second National Bank in an account earning interest at 5% per annum, compounded semi-annually. How much will Dover have in the account after five years if interest is reinvested? Use the formula method.(Do not round any intermediary calculations, and round your final answer to the nearest dollar.)

Answer 1

Answer:

Future value = Principal x Future value factor (2.5%, 10 years)

= $30,000 x 1.28008

=$38,402

Thus, Dover will have $38,402 in the account after five years if interest is reinvested.

.

Calculation of future value annuity factor:

Compounded semi-annually. So, Semi-annual rate of 5% is 2.5%

No. of interest payments = 5 years x 2 times = 10 times.

Hence, need to find out Future value factor at 2.5%, for 10 years.

Future value factor (i, n) = (1+i)ⁿ

Future value factor (2.5%,10 years) = (1+2.5%)¹⁰

= (1.025)¹⁰

= 1.28008