If you contribute $400 every quarter for 20 years, the amount of interest you would earn during the 20 years is $22,447.52
What future value formula is applicable in this case?
The applicable future value formula is that of an ordinary annuity which determines the future worth of $400 quarterly savings for 20 years bearing in mind that the quarterly interest rate is the annual interest rate divided by 4
FV=PMT*(1+r)^N-1/r
FV=worth of the annuity after 20 years=unknown
PMT=quarterly deposit=$400
r=quarterly interest rate=5%/4=1.25%
N=number of quarterly savings in 20 years=20*4=80
FV=$400*(1+0.0125)^80-1/0.0125
FV=$54,447.52
interest=$54,447.52-($400*80)
interest=$ 22,447.52
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