Question

1 ) Luana loves shopping for clothes, but considering the state of the economy, she has decided to start saving. At the end of each year, she will deposit $710 in her local bank, which pays her 4% annual interest. Luana decides that she will continue to do this for the next five years. Luana’s savings are an example of an annuity. How much will she save by the end of five years?

$3,268.75

$3,160.79

$3,845.59

$3,999.41

2) If Luana deposits the money at the beginning of every year and everything else remains the same, she will save ( 3,287.23 / 4,999.26 / 3,999.41 / 3,845.59 ) by the end of five years.

Answer 1

1.Information provided:

Annual deposit= $710

Time= 5 years

Interest rate= 4%

The question is solved by calculating the future value of ordinary annuity.

Enter the below in a financial calculator to compute the future value of ordinary annuity:

PMT= -710

N= 5

I/Y= 4

Press the CPT key and FV to compute the future value of ordinary annuity.

The value obtained is 3,845.59.

Therefore, Luna saved $3,845.59 at the end of 5 years.

Hence, the answer is option c.

2.Information provided:

Annual deposit= $710

Time= 5 years

Interest rate= 4%

The question is solved by calculating the future value of annuity due. Annuity due refers to annuity that occurs at the beginning of a period.

This can is 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.

Enter the below in a financial calculator in BGN mode to compute the future value of annuity due:

PMT= -710

N= 5

I/Y= 4

Press the CPT key and FV to compute the future value of annuity

The value obtained is 3,999.41.

Therefore, Luna saved $3,999.41 at the end of 5 years.

Hence, the answer is option c.

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