Question

You plan to work for Strickland Corporation for 12 years after graduation and after that want to start your own business. You expect to save and deposit $7,500 a year for the first 6 years (t = 1 through t = 6) and $15,000 annually for the following 6 years (t = 7 through t = 12). The first deposit will be made a year from today. In addition, your grandmother just gave you a $90,000 graduation gift that you will deposit immediately (t = 0). If the account earns 9% compounded annually, how much will you have when you start your business 12 years from now?

Select the correct answer.

a. $460,620

b. $460,595

c. $460,582

d. $460,608

e. $460,633

Answer 1

Value of 90,000 deposited today after 12 years = 90,000(1.09)¹²

= $253,139.83

Future value of annuity = Amount*[{(1+r)ⁿ – 1}/r]

Value of 7,500 each year after 6 years = 7,500*[{(1.09)⁶ – 1}/0.09]

= $56,425.01

Value after 12 years = 56,425.01(1.09)⁶

= $94,630.39

Value of 15,000 each year after 12 years =

15,000*[{(1.09)⁶ – 1}/0.09]

= $112,850.02

Hence, Total funds after 12 years = $460,620.24

i.e. $460,620