Question

2

(Related to Checkpoint 5.2) (Future value) Leslie Mosallam, who recently sold her Porsche, placed $10,600 in a savings account paying annual compound interest of 7 percent. a. Calculate the amount of money that will accumulate if Leslie leaves the money in the bank for 3.7 and 17 year(s) b. Suppose Leslie moves her money into an account that pays 9 percent or one that pays 11 percent. Rework part (a) using 9 percent and 11 percent c. What conclusions can you draw about the relationship between interest rates, time, and future sums from the calculations you just did?

Answer 1

Future value = present value * (1 + interest rate)^{number of years}

a]

3 years

Future value = $10,600 * (1 + 7%)³ = $12,985.46

7 years

Future value = $10,600 * (1 + 7%)⁷ = $17,021.28

17 years

Future value = $10,600 * (1 + 7%)¹⁷ = $33,483.44

b]

9%

3 years

Future value = $10,600 * (1 + 9%)³ = $13,727.31

7 years

Future value = $10,600 * (1 + 9%)⁷ = $19,377.21

17 years

Future value = $10,600 * (1 + 9%)¹⁷ = $45,872.91

11%

3 years

Future value = $10,600 * (1 + 11%)³ = $14,496.89

7 years

Future value = $10,600 * (1 + 11%)⁷ = $22,007.30

17 years

Future value = $10,600 * (1 + 11%)¹⁷ = $62,487.98

c]

Higher the interest rate, higher the future value

Higher the time period, higher the future value