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To save for a down payment on a home, suppose you decide to invest in an annuity that pays 7.0% annual interest,
compounded annually. If you contribute $8,000 every year for 5 years, how much interest would you earn during the
5 years? Enter your answer, rounded to the nearest cent, without the dollar sign or comma ($21,678.1235 should be
entered as 21678.12.)



Answer :

If you contribute $8,000 every year for 5 years, the interest would you would earn during the 5 years is:6005.91

What is future value of annuity?

The future value of the annuity means the future worth of 5 annual contributions  of $8000 every year, based on the fact that the deposits would earn 7.0% interest rate every year, in short, the worth of the savings in 5 years can be determined using the future value of an ordinary annuity as shown below:

FV=PMT*(1+r)^N-1/r

FV=accumulate balance after 5 years=unknown

PMT=annual savings=$8,000

r=interest rate per year=7.0%

N=number of annual payments over 5 years=5

FV=$8000*(1+7.0%)^5-1/7.0%

FV=$46,005.91

Total deposits in 5 years=$8000*5=$40,000

Interest =FV-total deposits

interest=$46,005.91-$40,000

interest=$6,005.91

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