General Question

Metadata's avatar

How to figure out this compounding interest word problem?

Asked by Metadata (37points) August 27th, 2014

Can someone help me with this word problem?
Uncle Al wants to open an account for his nieces and nephews that he hopes will have $100,000 in it after 25 years. How much should he deposit now into an account that yields 1.75% interest compounded monthly so he can be assured of meeting that goal amount?

The answer is $64,585.43, but I don’t understand how they arrived at this answer. I know the formula for Present Value and Future Value, but I don’t get the same answer. Thanks in advance for your help.

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2 Answers

LostInParadise's avatar

I will start you out. Let me know if you need further help.
The interest per month is i = .0175/12. The number of compounding periods = number of months = 12×25 = 300.
p (1+i)^300 = 100000, where p is the starting principal that we want to find.

Metadata's avatar

I figured out the answer. It was just a decimal mistake. Thank you, LostinParadise.

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