Question

Olivia and her spouse have saved $4,500 for a 12-day cruise vacation in europe. the couple needs $5,000 for a "nice" cabin or $6,000 for a "luxury" cabin. if cabin prices are expected to remain constant for the next three years and olivia expects to earn 6% per year on her investments, will the couple's savings be enough to afford the "nice" cabin in three years? can they afford the luxury cabin? why or why not?

Answer 1

In this item, we are to solve for the future worth of the $4,500 that is invested at present and will have a compound interest of 6% per year for the next three years. To solve for the future worth,

F = P x (1 + r)^n

where F is the future worth, P is the present worth, r is the decimal equivalent of the given rate, n is the number of years.

Substituting the known values,

F = ($4,500) x (1.06)^3
F = $5,359.57

Since the future worth of the money is greater compared to the price of the nice cabin then, Olivia and her spouse will have enough money for the "nice" cabin.