Question

Carmen is planning to invest $2000 in an account earning 3.15% interest, compounded quarterly, for 5 years. He used the following formula and variables to solve for the future value of the account after 5 years. FV = PV(1 + i)^nt FV = Future Value PV = 2000 i = 3.15/4 n = 4 t = 5 He found that the future value of this account will be $221,794,618.84. Is Carmen's solution correct? If not, explain what he did wrong and provide the correct solution

Answer 1

• incorrect value for i
• $2,339.72

Explanation:

It is not correct. Carmen should know that the approximate future value is near 16% more than the initial value. It won't be anywhere close to 221 million dollars.

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Carmen apparently used i = 3.15/4 in his formula instead of i = 0.0315/4. Using the correct value, the future value would be ...

FV = 2000(1 +0.0315/4)^(4·5) = $2,339.72