Summary Business Accounting

Question:

Wiseman Video plans to make four annual deposits of $2,000 each to a special building fund. The fund’s

assets will be invested in mortgage instruments expected to pay interest at 12% on the fund’s balance.

Using the appropriate annuity table, determine how much will be accumulated in the fund on December

31, 2016, under each of the following situations:

1. The first deposit is made on December 31, 2013, and interest is compounded annually.

2. The first deposit is made on December 31, 2012, and interest is compounded annually.

3. The first deposit is made on December 31, 2012, and interest is compounded quarterly.

4. The first deposit is made on December 31, 2012, interest is compounded annually, and interest earned

is withdrawn at the end of each year.



Answer:



1. FVA = $2,000 (4.7793) = $9,559

Future value of an ordinary annuity of $1: n = 4, i = 12% (from Table 3)



2. FVAD = $2,000 (5.3528) = $10,706

Future value of an annuity due of $1: n = 4, i = 12% (from Table 5)



3. FV of $1

Deposit i=3% FV n

First deposit: $2,000 x 1.60471 = $ 3,209 16

Second deposit 2,000 x 1.42576 = 2,852 12

Third deposit 2,000 x 1.26677 = 2,534 8

Fourth deposit 2,000 x 1.12551 = 2,251 4

Total $10,846