To solve the given problem, we need to break it down into two parts:
- Calculating the future value (FV) of the annuity when the deposits are made.
- Calculating the value of that future amount at the time we want to find it (30 years from today).
Step 1: Calculate the Future Value of the Annuity
Derek will deposit $3,859.00 per year for 14 years, starting 4 years from today. The annual interest rate is 6%.
Given:
- PMT (Payment) = 3,859
- N (Number of years for the annuity payments) = 14
- i/y (Interest rate per year) = 6%
- PV (Present Value) = 0 (since we are not calculating from any initial investment)
To find the future value at the end of the 14 years (which is when the last deposit is made), use the following formula for future value of an annuity:
\[ FV_{\text{annuity}} = PMT \times \left(\frac{(1 + i)^N - 1}{i}\right) \]
Calculating FV of Annuity:
- Compute FV for the annuity after 14 years:
-
Input values into the calculator:
- PMT = 3,859
- N = 14
- i/y = 6
- PV = 0
-
Calculate FV to find out how much will be in the account just after the last payment.
Step 2: Calculate the Future Value at Year 30
Since the last payment occurs at year 14, we need to consider how long the total amount will grow until year 30. From year 14 to year 30 is 16 years.
Repeat the calculation for the FV from year 14 to year 30
Now take the future value you calculated (let's call it \(FV_{14}\)), and treat it as the present value that will grow for another 16 years at 6% interest.
Given for this second calculation:
- PV = \( FV_{14} \) (the result from the first calculation)
- N = 16 (the number of years from the end of the annuity to year 30)
- i/y = 6%
-
Enter \( FV_{14} \) as PV, and set:
- N = 16
- i/y = 6
- PMT = 0 (since there are no more payments after the annuity)
-
Calculate the final FV at Year 30.
Summary of Settings for Finance Calculator:
For the first calculation (annuity future value)
- PMT: 3,859
- N: 14
- i/y: 6
- PV: 0
For the second calculation (future value after annuity)
- PV: Result from first calculation
- N: 16
- i/y: 6
- PMT: 0
This should guide you to enter the correct values to solve the problem using a finance calculator!