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Mark Johnson saves a fixed percentage of his salary at the end of each year. This year he saved $3,000. For each of the next 5 years, he expects his salary to increase at an 4% annual rate, and he plans to increase his savings at the same 4% rate. There will be a total of 6 investments, the initial $3,000 plus five more. If the investments earn a return of 9% per year, how much will Mark have at the end of six years?

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anthougo

Answer:

Mark Johnson

At the end of six years, Mark will have:

= $26,945.

Explanation:

a) Data and Calculations:

Savings for the first year = $3,000

Annual rate of salary and savings increase = 4%

Interest rate = 9%

Savings for Year 2 = $3,120 ($3,000 * 1.04)

Savings for Year 3 = $3,245 ($3,120 * 1.04)

Savings for Year 4 = $3,375 ($3,245 * 1.04)

Savings for Year 5 = $3,510 ($3,375 * 1.04)

Savings for Year 6 = $3,650 ($3,510 * 1.04)

                    Year 1       Year 2      Year 3     Year 4      Year 5     Year 6

Savings      $3,000       $3,120     $3,245    $3,375     $3,510     $3,650

FV factor      1.677           1.539        1.412        1.295       1.188         1.090

FV =            $5,031       $4,802    $4,592    $4,371       $4,170     $3,979

Total FV = $26,945

Total principal contribution = $19,900

Total interest = $7,045

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