CMA Foundation · Fundamentals of Business Mathematics and Statistics · Time Value of Money and Annuity - Simple and Compound Interest
Ms. Kavita deposits Rs 5,000 at the end of each year for 3 years in an account earning 10% p.a. compound interest. What will be the accumulated amount at the end of year 3? (Use 1.1^3 = 1.331)
The accumulated amount is Rs 16,550. For deposits at year-end, the future value is 5,000 multiplied by (1.331 minus 1) divided by 0.10, which is 5,000 times 3.31. Equivalent: 6,050 plus 5,500 plus 5,000, since the last deposit earns no interest.
- ARs 16,550Correct
- BRs 18,205
- CRs 15,000
- DRs 6,655
Explanation
FV of an ordinary annuity = 5,000 x (1.331 - 1)/0.10 = 5,000 x 3.31 = Rs 16,550. Check: 5,000 x 1.21 + 5,000 x 1.1 + 5,000 = 6,050 + 5,500 + 5,000 = 16,550. Rs 18,205 treats deposits as made at the start of each year. Rs 6,655 compounds only one deposit.
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