Annuity problem

V

vcantu04

New member
Joined
Mar 23, 2005
Messages
16
I been trying to solve this one but I am lost, Maybe if some one can help me get started.

On january 1, 2005, a person's savings account was worth $200,000. Every month there after, this person makes a cash contribution of $676 to the account. If the fund is expected to be worth $400,000 on January 1. 2010, what annual rate of interest is being earned on this fund?

so far I just have a cash flow diagram; I would use the annuity formula

A=F[I/((1+I^N)-1))] AND SELECT F=200,000 for the future amoount and n=5 and a = 676 but the initial 200,000 is what throws me off.

Any suggestions?
 
That's a very funny looking formula.

Why is n = 5? Monthly deposits for 5 years sounds more like n = 60.

You're going to have to make up your mind if there is a deposit on 1/1/2010.

Don't forget to convert your interest rate to be consistent with your payments.
 
I chose 5 because the problem asked for the annual iterest rate and it is 5 years so I understand the account will be compunded every year, but now I think it is more probable that the account is compounded monthly since deposits are amde monthly.
and yes, the final deposit will be made on jan 1, 2010.

But I am still lost with the initial 200,000 since there is no place for it on the formula. How can I solve the problem?

BTW book's answer is i'=11.55% per year
 
I find your formula sorta weird; and rate will be much higher than 11.55%,
close to 17%; if it is 11.55, then you've given us inaccurate information.

200000(1 + i)^60 + 676[((1 + i)^60 - 1)] / i = 400000

Ever heard of iteration?

After getting i, the annual rate will be (1 + i)^12 - 1
 
You must log in or register to reply here.
Top