Asked by Brittany McCord on May 18, 2024
Verified
Mari Ann is a beautician who currently leases her shop. She would like to buy her own building as she feels that it could be an investment which would provide a retirement income for her several years from now. To achieve this goal, Mari Ann has decided to save $500 a month, starting today, for the next five years. She expects to earn 6.45%, compounded monthly, on her savings. How much will she have saved by the end of the five years that she can use to buy a building?
A) $35,291.45
B) $35,306.18
C) $35,481.14
D) $36,909.18
E) $36,945.45
Compounded Monthly
Refers to the addition of interest to the principal sum of a deposit or loan on a monthly basis, where each month's interest payment is based on the principal plus previously added interest.
Beautician
A professional who provides services related to beauty treatments for skin, hair, and nails.
Retirement Income
The total earnings an individual receives after retiring from work, which can come from pensions, savings, investments, or government benefits.
- Understand the concept of financial saving goals and how to calculate future value towards achieving those goals.
- Estimate the future value of annuities and single cash flows using appropriate interest rates.
Verified Answer
KM
Kelvin MonetteMay 24, 2024
Final Answer :
C
Explanation :
Mari Ann is making monthly contributions of $500 for 5 years (or 60 months) at an annual interest rate of 6.45%, compounded monthly. This is a case of a future value of an annuity calculation, where the formula is FV = P * [((1 + r)^n - 1) / r], with P being the payment amount, r being the monthly interest rate (annual rate divided by 12), and n being the total number of payments. Plugging the values into the formula gives a future value close to the amount in option C, $35,481.14.
Learning Objectives
- Understand the concept of financial saving goals and how to calculate future value towards achieving those goals.
- Estimate the future value of annuities and single cash flows using appropriate interest rates.