Q11SE - Horngren'S Financial And Managerial Accounting

Question

David is entering high school and is determined to save money for college. David feels he can save $6,000 each year for the next four years from his part-time job. If David is able to invest at 7%, how much will he have when he starts college?

Step-by-Step Solution

Answer

David will have $26,640 in hand when he starts college.

Step 1: Definition of Future Value

Future value is a metric that determines the growth or future value of the investment when invested at a specified interest rate for a specified period. The annuity factor is used to determine future value.

Step 2: Calculation of future value

Calculation of future value:

$\begin{array}{rcl}\mathit{F}\mathit{u}\mathit{t}\mathit{u}\mathit{r}\mathit{e}\mathbf{ }\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}& \mathbf{=}& \mathit{S}\mathit{u}\mathit{m}\mathbf{ }\mathit{i}\mathit{n}\mathit{v}\mathit{e}\mathit{s}\mathit{t}\mathit{e}\mathit{d}\mathbf{\times }\mathit{F}\mathit{u}\mathit{t}\mathit{u}\mathit{r}\mathit{e}\mathbf{ }\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\mathit{o}\mathit{r}\mathit{d}\mathit{i}\mathit{n}\mathit{a}\mathit{r}\mathit{y}\mathbf{ }\mathit{a}\mathit{n}\mathit{n}\mathit{u}\mathit{i}\mathit{t}\mathit{y}\mathbf{ }\mathit{f}\mathit{a}\mathit{c}\mathit{t}\mathit{o}\mathit{r}\mathbf{ }\mathit{o}\mathit{f}\mathbf{ }\mathbf{7}\mathbf{\%}\mathbf{ }\mathit{a}\mathit{t}\mathbf{ }\mathit{Y}\mathit{e}\mathit{a}\mathit{r}\mathbf{ }\mathbf{4}\\ & \mathbf{=}& \mathbf{\$}\mathbf{6}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{4}\mathbf{.}\mathbf{440}\\ & \mathbf{=}& \mathbf{\$}\mathbf{26}\mathbf{,}\mathbf{640}\end{array}$