Question

i. You deposit $5000 in an account earning 5% interest compounded monthly. How much will you have in the account in 5 years?

ii. Suppose you want to have $400,000 for retirement in 20 years. Your account earns 8% interest. How much would you need to deposit in the account each month?

Answer 1

i.Information provided:

Present value= $5,000

Interest rate= 5%/12= 0.4167% per month

Time= 5 years*12= 60 months

The question is solved by calculated by computing the future value.

Enter the below in a financial calculator to compute the future value:

PV= -5,000

I/Y= = 0.4167

N= 60

Press the CPT key and FV to compute the future value.

The value obtained is 6,416.79.

Therefore, I will have $6,416.79 in 5 years.

ii. Information provided

Future value= $400,000

Time= 20 years*12= 240 months

Interest rate= 8%/12= 0.6667% per month

The amount to be deposited each month is calculated by entering the below in a financial calculator:

FV= 400,000

N= 240

I/Y= 0.6667

Press the CPT key and PMT to compute the amount to be deposited each month.

The value obtained is 679.09.

Therefore, the amount to be deposited each month is $679.09.

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