It is January 1st and Darwin Davis has just established an IRA (Individual Retirement Account). Darwin will put $1,000 into the account on December 31st of this year and at the end of each year for the following 39 years (40 years total). How much money will Darwin have in his account at the beginning of the 41st year? Assume that the account pays 12% interest compounded annually, and round to the nearest $1,000.
A) $93,000
B) $766,000
C) $767,000
D) $850,000

Question

Quizplus · Accepted Answer

Using the formula for compound interest, we can find the future value of Darwin's IRA:
FV = P(1+r)^n
where P = $1,000, r = 0.12, and n = 40 (since he is contributing for 40 years).
FV = $1,000(1+0.12)^40
FV = $767,274.87
Rounding to the nearest $1,000, Darwin will have $767,000 in his IRA at the beginning of the 41st year. Therefore, the best choice is C.

It Is January 1st and Darwin Davis Has Just Established