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?

Question

Quizplus · Accepted Answer

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.

Mari Ann Is a Beautician Who Currently Leases Her Shop