Worked example 6: Determining the value of an investment

QUESTION
Simon starts to save for his retirement. He opens an investment account and imme-
diately deposits R 800 into the account, which earns 12,5% per annum compounded
monthly. Thereafter, he deposits R 800 at the end of each month for 20 years. What is
the value of his retirement savings at the end of the 20 year period?
SOLUTION
Step 1: Write down the given information and the future value formula
F =
x[(1 +i)
n
1]
i
x = 800
i =
0,125
12
n = 1 + (20 12) = 241
Note that we added one extra month to the 20 years because Simon deposited R 800
immediately.
Step 2: Substitute the known values and calculate F
F =
800

(1 +
0,125
12
)
241
1

0,125
12
= R 856 415,66
Step 3: Write the nal answer
Simon will have saved R 856 415,66 for his retirement.
Exercise 3 2: Future value annuities
1. Shelly decides to start saving money for her sons future. At the end of each
month she deposits R 500 into an account at Durban Trust Bank, which earns an
interest rate of 5,96% per annum compounded quarterly.
a) Determine the balance of Shellys account after 35 years.
b) How much money did Shelly deposit into her account over the 35 year
period?
c) Calculate how much interest she earned over the 35 year period.
2. Gerald wants to buy a new guitar worth R 7400 in a years time. How much
must he deposit at the end of each month into his savings account, which earns
a interest rate of 9,5% p.a. compounded monthly?
114 3.3. Future value annuities