Question

The Harris Family Entertainment Club deposited R3 600 in an investment account a year ago, with the intention of purchasing new equipment in four years’ time. Today, it is adding a further R5 000 to this account. Plans are to make a final deposit of R7 500 in the account next year. How much will be available when the family is ready to buy the equipment, assuming the investment earns a 7% rate of return?

Answer 1

Explanation:

To calculate this, we need to use the formula for future value of an annuity:

FV = PMT x ((1+i)^n - 1)/i

Where:

PMT = the periodic payment (or deposit)

i = the interest rate per period

n = the number of periods

In this case, there are three deposits:

- R3,600 deposited one year ago

- R5,000 deposited today

- R7,500 to be deposited next year

We can calculate the future value of each of these deposits separately, and then add them together to get the total future value:

Future value of R3,600 deposited one year ago:

n = 4 (4 years until the equipment purchase)

i = 7% per year

PMT = R3,600

FV = R3,600 x ((1+0.07)^4 - 1)/0.07 = R4,661.07

Future value of R5,000 deposited today:

n = 3 (3 years until the equipment purchase)

i = 7% per year

PMT = R5,000

FV = R5,000 x ((1+0.07)^3 - 1)/0.07 = R6,885.02

Future value of R7,500 to be deposited next year:

n = 2 (2 years until the equipment purchase)

i = 7% per year

PMT = R7,500

FV = R7,500 x ((1+0.07)^2 - 1)/0.07 = R8,733.63

Total future value = R4,661.07 + R6,885.02 + R8,733.63 = R20,279.72

Therefore, there will be R20,279.72 available when the family is ready to buy the equipment, assuming a 7% rate of return on the investment.