Question

Janice would like to send her parents on a cruise for their 25th wedding anniversary. She has priced the cruise at $15,000, and she has 5 years to accumulate this money. How much must Janice deposit annually in an account paying 10 percent interest in order to have enough money to send her parents on the cruise?

Answer 1

Here, we have to use the Future Value Ordinary Annuity formula to find out the amount that must the Janice deposit annually in an account

Let’s take “X” be the amount of annual deposit to be made

Future Value = $15,000

Number of years (n) = 5 year

Interest Rate (r) = 10% per year

Future Value of Annuity = P x [{(1+ r)ⁿ - 1} / r ]

$15,000 = “X” x [{(1 + 0.10)⁵ – 1} / 0.10]

$15,000 = “X” x [0 0.61051 / 0.10]

$15,000 = “X” x 6.10510

“X” = $15,000 / 6.10510

“X” = $2,457

“Therefore, the Janice must deposit $2,457 annually in an account in order to have enough money to send her parents on the cruise”