The solution to this problem requires time value of money calculations.Reference to Tables 9-1 through 9-4 in the text is necessary to complete the calculations.
-
David,a high school math teacher,wants to set up an IRA account into which he will deposit $2,000 per year.He plans to teach for 20 more years and then retire.If the interest on his account is 7% compounded annually,how much will be in his account when he retires?
A)$4,800
B)$21,118
C)$74,458
D)$81,990

Question

The solution to this problem requires time value of money calculations.Reference to Tables 9-1 through 9-4 in the text is necessary to complete the calculations.  
-
David,a high school math teacher,wants to set up an IRA account into which he will deposit $2,000 per year.He plans to teach for 20 more years and then retire.If the interest on his account is 7% compounded annually,how much will be in his account when he retires?
A)$4,800
B)$21,118
C)$74,458
D)$81,990

Quizplus · Accepted Answer

We need to use the formula for the future value of an annuity (where PMT=payment, i=interest rate and n=number of periods):
FV = PMT x [(1 + i)^n - 1] / i

Here, PMT = $2,000, i = 7% and n = 20 years. Plugging in the values, we get:

FV = $2,000 x [(1 + 0.07)^20 - 1] / 0.07
FV = $81,990.11

Therefore, the amount in David's IRA account when he retires will be $81,990.

The correct answer is D.

The Solution to This Problem Requires Time Value of Money