You are saving for a car and have decided you can afford to deposit $5,000 into a savings account at the end of each of the next five years, at which point you will withdraw the money to purchase the car. You can deposit the money in a savings account that earns 8% interest with no annual fee, or you can choose a savings account that earns 10% interest, but has an annual fee of $100.00 that would come out of your deposits.a. If you choose the free savings account, how much money will you be able to withdraw five years from now?b. If you choose the savings account with a fee, how much money will you be able to withdraw five years from now?c. Which option would be best for you financially?
What will be an ideal response?
a. $29,333 = $5,000 × 5.8666
b. $29,915 = $4,900 × 6.1051
c. The account with the fee
The future value of an annuity is the amount of the annuity times the future value of an annuity factor for the given time period and interest rate. Choose the option with the higher future value.
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