Question

Part 1: You and your best friend want to take a vacation to Australia. You have done some research and discovered that it will cost $2500 for the plane tickets, all-inclusive hotel and resort, and souvenirs. You have already saved $2200. If you invest this money in a savings account with a 1.55% interest rate compounded annually, how long will it take to earn enough money to go on the trip? Use the compound interest formula A = P (1 + i)n, where A is the accumulated amount, P is the principal, i is the interest rate per year, and n is the number of years. Round your final answer to the nearest tenth .

Part 2: You are planning to go on this trip in 2 years. How much money will you need to invest at a 1.55% interest rate compounded annually in order to have $2500 in 2 years? Use the compound interest formula A = P (1 + i)n. (Round final answer to the nearest cent, but otherwise don’t round any intermediate values)


Part 3: Now say you only have $2000 to invest and the highest interest rate you can find is 1.8% compounded annually. If you decide to wait 7 years to go on the trip, how much money will you have to spend on the trip? Use the compound interest formula A = P (1 + i)n. (Round final answer to the nearest cent, but otherwise don’t round any intermediate values)

Part 4: Write a paragraph explaining how you would prepare financially for this trip. Would you invest the $2200 and wait until it grows to $2500? Would you add to the investment of $2200 so it will grow to $2500 by the time you want to take the trip? Would you invest the $2200 and come up with the rest of the money when you want to take the trip? Explain your answer.

Answer 1

SEE EXPLANATIONS

Explanation:

PART 1:

you have 2,200 and interest is 1.55%

A = 2200(1+0.0155)1 A = 2,234.10

A = 2200(1+0.0155)10 A = 2,565.80

A = 2200(1+0.0155)9 A = 2,526.63

A = 2200(1+0.0155)8 A = 2,488.07

9 Years with $2,526.63

PART 2:

A = 2425(1+0.0155)2 A = 2,500.76

You need to invest $2,425.00

PART 3:

A = 2000(1+0.018)7 A = 2,266.02

You have $2,266.02 which is underbudget

PART 4:

Personally, I would add to the investment of $2,200 so that it will grow to $2,500 faster. If I waited for just the $2,200 to grow alone it would take 9 years and if I'm looking at a trip now I would like to go sooner. So if I keep adding to the original $2,200 overtime it will collect interest faster and I would be able to take the trip sooner. I justify my answer with PART 2.