Question

The Flores Family loves to go sailing on the weekends. Mr. Flores has decided to purchase a more spacious sailboat. The sailboat he is interested in buying in 4 years will cost him $25,000. An account at Invest Well Bank earns 2% per year compounded monthly. How much should Mr. Flores deposit in this account at the beginning of each month to be able to pay cash for the sailboat in 4 years?

a) $467.33

b) $534.09

c) $500.71

d) $607.48

e) $510.71

f) None of the above.

Answer 1

Information provided:

Future value= $25,000

Time= 4 years*12 = 48 months

Monthly interest rate= 2%/12 = 0.1667%

The question is solved by computing the amount of annuity due.

Annuity due refers to annuity that occurs at the beginning of a period.

This can also be solved using a financial calculator by inputting the below into the calculator:

The financial calculator is set in the end mode. Annuity due is calculated by setting the calculator to the beginning mode (BGN). To do this, press 2^ndBGN 2^ndSET on the Texas BA II Plus calculator.

The question can be solved by entering the below into the financial calculator in BGN mode:

FV= 25,000

N= 48

I/Y= 0.1667

Press the CPT key and PV to calculate the amount of monthly deposit to be made at the beginning of the month.

The value obtained is 499.88.

Therefore, Mr.Flores should deposit $499.88 at the beginning of the month to pay cash for the sailboat in 4 years.

Hence, the answer is option f.

In case of any query, kindly comment on the solution.