Jacob Sawyer will deposit $3,000 into a special account each year beginning December 31, 2014, with the last deposit being made on December 31, 2018. Jacob wants to know how much will be in his account on December 31, 2018, immediately after the final deposit, if the account earns 10% compounded annually. To solve the problem, Jacob must find the future value of
A) a single sum
B) a deferred annuity
C) an ordinary annuity
D) an annuity due

Question

Quizplus · Accepted Answer

Jacob is depositing the same amount each year for a fixed period of time, which represents an ordinary annuity. Therefore, the future value can be calculated using the formula for the future value of an ordinary annuity:

FV = PMT x [(1 + r)^(n-1) / r]

Where:
PMT = $3,000
r = 10% = 0.10 (annual interest rate)
n = 5 (number of deposits)

FV = $3,000 x [(1 + 0.10)^(5-1) / 0.10] = $16,289.62

Therefore, the answer is C as the future value is for an ordinary annuity with equal payments made at the end of each period.

Jacob Sawyer Will Deposit $3,000 into a Special Account Each