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- 4 Marks
Question
Joy Mummy Ltd is establishing an endowment fund to finance a scholarship scheme to provide funding for the education of children of its employees. The company plans to make an initial deposit of GH¢500,000 into the fund now. The initial deposit will be invested for three years before any disbursements will be made from the fund. The effective annual rate of return on the fund is expected to be 14% in the first year, 15% in the second year, and 16.5% in the third year.
Required:
Compute the balance of the fund at the end of three years. (4 marks)
Answer
The future value of the endowment fund at the end of three years can be calculated using the formula for compound interest:
FV3 = P0(1+i1) (1+i2) (1+i3)
Where:
- P0 = GH¢500,000 (Initial deposit)
- i1 = 14% (Year 1 interest rate)
- i2 = 15% (Year 2 interest rate)
- i3 = 16.5% (Year 3 interest rate)
Calculation:
FV3 = GH¢500,000 × (1.14 × 1.15 × 1.165)
FV3 = GH¢500,000 × 1.527315 = GH¢763,657.50
Thus, the balance of the fund at the end of three years is GH¢763,657.50.
- Tags: Compound Interest, Endowment Fund, Future Value
- Level: Level 2
- Topic: Simple interest and compound interest
- Series: NOV 2019
- Uploader: Theophilus