Question

PJ wants to add money to her RRSP. She will add $50 per month for the next 12 years. The interest rate of the account is 3.2%/a, compounded monthly.

a) $8,824.56
b) $10,000.00
c) $9,225.48
d) $11,356.72

Answer 1

To find the future value of regular monthly RRSP contributions for 12 years at a 3.2% annual interest rate compounded monthly, we apply the formula for the future value of an annuity with the known variables for payment amount, interest rate, and number of periods.

Step-by-step explanation:

The question asks us to calculate the future value of a regular investment into a Registered Retirement Savings Plan (RRSP) with a given interest rate and time period. To solve it, we must use the formula for the future value of an annuity:

FV = P * [(1 + r)^n - 1] / r

Where:

• FV = future value of the annuity
• P = periodic payment amount
• r = periodic interest rate (annual interest rate divided by the number of compounding periods per year)
• n = total number of payments (compounding periods)

Given that:

• P = $50/month
• r = 3.2% per annum, compounded monthly (which is 0.032/12 per month)
• n = 12 years * 12 months/year = 144 months

Substituting these values into the formula we get:

FV = 50 * [(1 + 0.032/12)^144 - 1] / (0.032/12)

Calculating the above expression will give us the total amount PJ would accumulate in her RRSP account after 12 years.