Question

Mr. Hughes has contributed $4000.00 per year for the last ten years into a RRSP account earning 9.00% compounded annually. Suppose he leaves the accumulated contributions for another five years in the RRSP at the same rate of interest. A) How much will Mr. Hughes have in total in his RRSP account? B) How much did Mr. Hughes contribute? C) How much will be interest?

Answer 1

A) $93,504.818

B) $40,000

C) $53,504.818

Explanation:

Yearly contribution ( periodic payment) = $4000

Period (p) = 10years

Additional period(y) = 5years

Annual interest(r) = 9% = 0.09

Future value (FV) =

periodic payment [(1 + r)^y - 1] / r

4000 [(1 + 0.09)^10 - 1 / 0.09]

4000[1.09^10 - 1 / 0.09]

4000[1.3673636 / 0.09]

4000(15.192929)

= 60771.716

If left for five more years:

FV = 60771.716(1 + r)^n

FV = 60771.716(1 + 0.09)^5

FV = 60771.716(1.09)^5

FV = 60771.716(1.5386239549)

FV = $93,504.818

B) MR. HUGHES CONTRIBUTION :

Periodic payment × p ; $4000 was deposited annually for 10 years.

$4000 × 10 = $40,000

C) Interest = Future value - contribution

$93,504.818 - $40,000

= $53,504.818