Question

After taking Business classes you realize the importance of financial planning, and determine to deposit some money each year into your bank account for future investments. Since you were from New England area originally, you would like to accumulate $100,000 as your down payment for a house in suburban Boston so that you could enjoy the fun of snow plowing in winter. If you deposit $2,000 per year into an account that earns 10% interest per year compounded annually, how long does it take for you to accumulate the $100,000 target? If you would like to shorten the number of years to five years with the same 10% return annually, how much do you need to deposit per year at the end of each year? Please show in Excel format.

Answer 1

Calculation of time period required to accumulate the $100,000 in account.
$100,000 = $2,000 * Future value annuity factor 10% n years
Future value annuity factor 10% n years = $100,000 / $2,000 = 50
Now we have to look the future value annuity table for the figure of 50 in 10% range and check the corresponding time period.
In Future value table , the nearest figure is 51.16 which is at 10% in 19 years means you require atleast 19 years to accumulate the $100,000 amount in account by depositing $2,000 per year.

If time is to be shorten to 5 years at 10% return. Amount required will be calculated as:
Annual deposit amount = $100,000 / future value annuity factor 10% 5 years
= $100,000 / 6.1051
= $16,379.75 per year.