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23 July, 06:09

Suppose you invest a sum of $ 1500 in an interest-bearing account at the rate of 12 % per year. What will the investment be worth six years from now? (Round your answer to the nearest whole dollar.) In six years the investment will be worth $.

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  1. 23 July, 07:44
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    In six years the investment will be worth $4421

    Explanation:

    The investment of $1500 will receive interest payment at 12% p. a. The interest payments are like an annuity as the amount is fixed and is paid after equal intervals and for a definite period i. e. 6 periods.

    To calculate the worth of investment 6 years from now, we need to calculate the future value of both the principal and interest annuity after 6 years.

    The formula for future value of principal is = PV * (1+r) ^t

    Future value of principal = 1500 * (1+0.12) ^6 = $2960.73

    The formula for future value of annuity is given is:

    FV of ordinary annuity = PMT * [ ((1+i) ^t - 1) / i]

    Where, PMT is the periodic interest payment. The interest payment is = 1500 * 0.12 = $180 per year

    Future value of annuity = 180 * [ ((1+0.12) ^6 - 1) / 0.12]

    Future value of annuity = $1460.73

    The total value of investment = 2960.73 + 1460.73 = $4421.46 rounded off to $4421
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