Given a 7 percent interest rate, compute the year 6 future value if deposits of $2,500 and $1,500 are made in years 2 and 3, respectively, and a withdrawal of $900 is made in year 4.
A) $2,721.44
B) $4,084.15
C) $4,491.60
D) $7,059.04

Question

Quizplus · Accepted Answer

To calculate the future value of these transactions, we need to apply the formula for future value of a single sum for each transaction and then sum them up. The formula is FV = PV * (1 + r)^n, where FV is the future value, PV is the present value (the amount of the deposit or withdrawal), r is the interest rate per period, and n is the number of periods until maturity.1. For the $2,500 deposit in year 2, it will earn interest for 4 years (from year 2 to year 6), so its future value is $2,500 * (1 + 0.07)^4 = $3,348.85.2. For the $1,500 deposit in year 3, it will earn interest for 3 years (from year 3 to year 6), so its future value is $1,500 * (1 + 0.07)^3 = $1,785.30.3. For the $900 withdrawal in year 4, it would reduce the future value, but since it's a withdrawal, we calculate its impact over 2 years (from year 4 to year 6) and then subtract it from the total. The future impact is $900 * (1 + 0.07)^2 = $1,050.00.Adding the future values of the deposits and subtracting the future impact of the withdrawal gives us: $3,348.85 + $1,785.30 - $1,050.00 = $4,084.15.

Given a 7 Percent Interest Rate, Compute the Year 6