When you were born, your parents deposited $10,000 in the bank. The bank offers a fixed interest rate of 4 percent. On your eighteenth birthday, your parents decide to withdraw the money that they deposited to pay for your college tuition
How much money can they expect to withdraw? Assume that interest is compounded annually.
To calculate the amount of money that can be withdrawn at the end of 18 years, the compound interest formula can be used here. The compound interest formula calculates the future value of an investment with interest rate r until the final withdrawal in year T.In this problem, r is 4%, the initial investment is $10,000, and T is 18
The amount in the bank after T years = future value = (1 + r)¬¬T × (original principal)
= (1 + 0.04)18 × $10,000
= 2.0258 × $10,000
= $20,258
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