Q15SE - Horngren'S Financial And Managerial Accounting

Question

Determining future value

David is entering high school and is determined to save money for college. David feels

he can save $5,000 each year for the next four years from his part-time job. If David is

able to invest at 6%, how much will he have when he starts college?

Step-by-Step Solution

Answer

David will have $21,875 when he starts college.

Step 1: Definition of future value

The future value is the valuation of the current investment at future date.

Step 2: Calculation of future value

$\begin{array}{c}\mathrm{Future}\mathrm{Value}=\mathrm{Period}\mathrm{Payments}\times \mathrm{Future}\mathrm{value}\mathrm{of}\mathrm{ordinary}\mathrm{annuity}\mathrm{of}\mathrm{\$}1\\ =\mathrm{\$}5,000\times 4.375\\ =\mathrm{\$}21,875\end{array}$