Jasmine and her spouse have saved $4,500 for a 12-day cruise vacation in Europe. The couple needs $5,000 for a "nice" cabin or $6,000 for a "luxury" cabin. If cabin prices are expected to remain constant for the next three years and Jasmine expects to earn 6% per year on her investments, will the couple's savings be enough to afford the "nice" cabin in three years? Can they afford the luxury cabin? Why or why not?
A) Yes, they can afford the "nice" cabin or the luxury cabin because their $4,500 investment will increase to $6,360 by the end of year three.
B) Yes, they can afford the "nice" cabin or the luxury cabin because their $4,500 investment will increase to $5,360 by the end of year three.
C) Yes, they can afford the "nice" cabin but NOT the luxury cabin because their $4,500 investment will only increase to $5,360 by the end of year three.
D) No, they cannot afford the "nice" cabin or the luxury cabin because their $4,500 investment will only increase to $4,950 by the end of year three.

Question

Quizplus · Accepted Answer

After three years at 6% interest, Jasmine's $4,500 investment will grow to:

$4,500 x (1 + 0.06)^3 = $5,361.54

This is enough to afford the "nice" cabin, which costs $5,000. However, it is not enough to afford the "luxury" cabin, which costs $6,000. Therefore, choice C is the correct answer.

Jasmine and Her Spouse Have Saved $4,500 for a 12-Day