Question

To pay his university education, Mr. Ahmed is saving $ 1000, at the beginning of each year for the next 7 years in a Bank Muscat account paying 10% interest rate. How much will Mr. Ahmed have in that account at the end of 7^th year? Mr. Ahmed need $ 17000 to pay his university fees in future, justify your suggestion to him regarding his investment in Bank Muscat?

Answer 1

Money in the account at the end of 7th year is calculated as follows,

Future value of deposit =P*(((((1+r)ⁿ-1)*(1+r))/r))

Where,

P means Periodic payment

r means rate per period

n means no. of periods

Future value of deposit =P*(((((1+r)ⁿ-1)*(1+r))/r))

Future value of deposit =1000*(((((1+0.10)⁷-1)*(1+0.10))/0.10))

Future value of deposit =$10,435.89

Money to be deposited at the beginning of each year to get $17,000 at the end of 7th year is calculated as follows,

Future value of deposit =P*(((((1+r)ⁿ-1)*(1+r))/r))

From the above we can calculate P as follows,

P =Future value of deposit/(((((1+r)ⁿ-1)*(1+r))/r))

P =17,000/(((((1+0.10)⁷-1)*(1+0.10))/0.10))

P = $1,628.99

Justification

Mr Ahmed saves 1000 at the beginning of each period for next 7 years in bank muscat at 10% interest rate. At the end of 7th year Mr Ahmed will have 10,435.89 in his account. If the required amount for Mr Ahmed at the end of 7th year is 17,000 to pay his university bill, he must deposit 1,628.99 each at the beginning of year for 7 years. So Mr Ahmed must make an additional contribution of 628.99 to achieve his target amount.