Question

Leslie McCormack is in the spring quarter of her freshman year of college. She and her friends already are planning a trip to Europe after graduation in a little over three years. Leslie would like to contribute to a savings account over the next three years in order to accumulate enough money to take the trip. Assume an interest rate of 14%, compounded quarterly. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)How much will she accumulate in three years by depositing $740 at the end of each of the next 12 quarters, beginning three months from now

Answer 1

Answer: $10,805.45

Step-by-step explanation:

As she is paying a constant amount of $740 every quarter, this is an Annuity. Her starting 3 months from now means that this is an ordinary annuity.

The interest rate needs to be adjusted to a quarterly rate:

= 14%/4

= 3.5%

Future value of ordinary annuity = Annuity * [ (1 + r)^rate - 1] / rate

= 740 * [ ( 1 + 3.5%)¹² - 1] / 3.5%

= $10,805.45