How would you do this problem?

Question

Matt is saving to buy a new motorcycle. If he deposits $40 at the end of each month in an account that pays an annual interest rate of 4.5%, how much will he have in 30 months? Assume that the compounding is being done monthly.

Answer 1

You need the future value of an ordinary annuity. An ordinary annuity is a series of equal periodic payments made at the end of each period, with interest compounding at the end of each period. Annuity problems can be solved using annuity tables, formulas, spreadsheet functions, or a financial calculator. The calculator is simplest once you understand annuities and compound interest. You are given some information and you have to solve for an unknown variable. There are four of five variables that have to be input into the formula or spreadsheet or calculator They are

PV = present value, a sum with which the annuity starts the will pay future rents (periodic payments).
FV = future value, a sum that will accumulate from the periodic rents and the interest earned.
PMT =the amount of periodic rent
N = the number of rents
i% = the percentage interest compounding over N periods.

In this problem you have PV, PMT, M, and i% and you must solve for FV.

PV = 0
PMT = 40
N = 30 months
i% = 4.5%/12 = .375% pr month
FV = ? =1,257.60