Answer to Question #150555 in Financial Math for Elfrida

Question

Mr. Owusu in planning for his child's education decided to save 1000 yearly in advance into an investment account which pays an annual interest of 36%compounded yearly. How much will he have in the account at the end of 5 years? Draw the sinking funds schedule to show the growth of the amount.

Answer 1

Define terms:

P - principal, or investment ($1000);

r - rate of interest (36% or 0.36);

n - number of times the interest is compounded in a year (1);

t - time (5 years).

Then, at the end of 5 years he will have

$$A=P\bigg(1+\frac rn\bigg)^{nt},\\\space\\ A=\$1000\bigg(1+\frac{0.36}{1}\bigg)^{1\cdot5}=\$4652.$$

Draw the sinking funds schedule. We will begin with creating columns: Year, Beginning Balance on current year (what father has invested), rate (the multiplication factor that increases the beginning balance by the end of the year so is becomes End Balance), and End Balance (the balance on the account increased). According to the condition, the annual interest is 36% compounded yearly, which means that every next year the End Balance from the previous year is used as Beginning Balance. So, the schedule looks like this: