You deposit 5000 in a savings account that yields 5 annual i

You deposit $5,000 in a savings account that yields 5% annual interest.

a.How much do you have in your savings account after 5 years?

b.What about after 10 years?

Solution

Future value (FV) = Present value (PV) x (1 + interest rate)^{Number of years}

(a) PV = $5,000, r = 5%, N = 5

FV = $5,000 x (1.05)⁵ = $5,000 x 1.2763 = $6,381.41

(b) PV = $5,000, r = 5%, N = 10

FV = $5,000 x (1.05)¹⁰ = $5,000 x 1.6289 = $8,144.47