Amanda wants to have $20,000 in 6 years to buy a car. She plans to start...

Amanda wants to have $20,000 in 6 years to buy a car. She plans to start saving in 2 years.If money grows according to simple interest rate with accumulation functiona(t) = 1 + 0.05t.How much principal she will need to reserve for saving?

Solutions

Expert Solution

As she plans to start saving in 2 years, hence she will get the interest for 4 years. Therefore t = 4.

As per Equation t = 1 + 0.05(4) = 1.2

Therefore amount to be reserve in 2 years = 20000 / 1.2 = $16666.67

Also we can cross check the interest amount on principal = 16666.67*4*0.05 = $3333.33

Therefore total amount at year 6 = 16666.67 + 3333.33 = $20000

Hence she will need to reserve $16666.67 at year 2

jeff jeffy answered 2 years ago

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