Question

Marnie makes regular annual payments of $5,000 to her Individual Retirement Account (IRA). If the amount of interest she earns is 5.6% per year, determine the future value of the account after 35 years. Round to the nearest cent.

a.
$540,581.69
b.
$511,914.48
c.
$190,508.32
d.
$189,623.41

Answer 1

First Method,

Solve the given question by using the formula,

Future value= Annuity((1+i)ⁿ-1 / i)

F= A((1+i)ⁿ-1 / i)

where

i=5.6%=0.056

A=annuity= $5,000

n= no. of years = 35

By putting the values,

F= ($5,000)( ((1+0.056)³⁵-1 )/ 0.056)

= $ 511914.48

b is the correct answer.

Second Method.

By using factor table,

Annual Payment by Marine=A= $5,000

Amount of interest she earns =i= 5.6%

We have to determine the future value of account after 35 years.

n=35

F=A(F/A, i%, n)

By putting the values,

F=($5,000)(F/A, 5.6%, 35)

From the economics factor table,

we find by interpolation that at 5.6% for 35 years value of F/A = 102.989

F=($5,000)(102.989)

= $514945

Answer 2

If today you were to invest $5,000.00 at a rate of 5.60%, you would have $511,914.48 at the end of 35 time periods (e.g. weeks, months, or years). In other words, a future value of $511,914.48 is equal to a present value of only $5,000.00.

What does this mean to you? Well, if you had a choice between taking an amount higher than the $5,000.00 today and taking the $511,914.48 at the end of 35 time periods, you should take the money today. By doing so, you would be able to invest the higher amount at 5.60% for 35 equal time periods, which would end up giving you more than $511,914.48. Answer is B. Hope this helps. Thanks.