Abdol realizes he needs to earn more interest than his current money market can provide. Using annual compounding on an account that pays 5.5% interest annually, find the amount Abdol needs to invest to have the $8,000 down payment for his house in 5 years?

Question

Mathematics

Hobbes

21 January, 19:15

Abdol realizes he needs to earn more interest than his current money market can provide. Using annual compounding on an account that pays 5.5% interest annually, find the amount Abdol needs to invest to have the $8,000 down payment for his house in 5 years?

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Answers (1)

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Callum Small · Answer 1

Answer: Abdol needs to invest $6121.1

Step-by-step explanation:

We would apply the formula for determining compound interest which is expressed as

A = P (1 + r/n) ^nt

Where

A = total amount in the account at the end of t years

r represents the interest rate.

n represents the periodic interval at which it was compounded.

P represents the principal or initial amount deposited

From the information given,

A = $8000

r = 5% = 5.5/100 = 0.055

n = 1 because it was compounded once in a year.

t = 5 years

Therefore,

8000 = P (1 + 0.055/1) ^1 * 5

8000 = P (1 + 0.055) ^5

8000 = P (1.055) ^5

8000 = 1.30696P

P = 8000/1.30696

P = $6121.1