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At the end of each year for 8 years, a corporation will deposit $12,500 in a depreciation fund
to provide for replacement of machinery at the end of 8 years. If the fund accumulates
at 8% effective, how much is in it just after the:
(a) last deposit;
(b) 5th deposit?
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It is a classic Ordinary Annuity saving plan. The general formula is
FV = , (1)
where FV is the future value of the account; P is the annual payment (deposit);
r is the annual percentage rate presented as a decimal;
n is the number of deposits (= the number of years, in this case).
(a) Under given conditions, P = 12500; r = 0.08; n = 8. So, according to the formula (1),
Future value at the end of the 8-th year
FV = = $132,957.85 (rounded).
It is the ANSWER to question (a).
(b) This time, P = 12500; r = 0.08; n = 5. So, according to the formula (1),
Future value at the end of the 5-th year
FV = = $73,332.51 (rounded).
It is the ANSWER to question (b).
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On Ordinary Annuity saving plans, see the lessons
- Ordinary Annuity saving plans and geometric progressions
- Solved problems on Ordinary Annuity saving plans
in this site.
The lessons contain EVERYTHING you need to know about this subject, in clear and compact form.
When you learn from these lessons, you will be able to do similar calculations in semi-automatic mode.