Monthly payment = 241.925
Step-by-step explanation:
Effective interest rate is the actual interest paid at the end of the year AFTER compounding. Most credit cards charge x% ("APR", annual percentage rate)annually. Since it is compounded monthly, each month the balance increases by (x//12)%, and by the end of the year, you will be paying effectively (x//12)^12 %, which is the effective interest rate.
Here, effective (annual) interest rate is 8%. We need the monthly rate, i.
(1+i)^12 = 1.08
Solving, we have i = 0.6434% monthly approximately
To balance the deposits and withdrawals, we note that the last withdrawal is the beginning of year 19, and the last deposit is the last month of year 18. We therefore conclude that the "future values" fall on the same day, and that they are equal.
We consider the annual deposits D (accumulated at the end of the year, and annual withdrawals W are in separate accounts. By the end of the operations, one will balance the other (they are equal).
We will need the following formula to calculate future value F given the periodic amount, A, interest rate per period, i, and the number of periods.
F(A,i,n) = A*((1+i)^n-1)/i
Step 1:
calculate the future value of the withdrawals
A = W = 25000 (annual withdrawal)
i = 8% (effective annual interest)
n = 4 years (beginning of 16,17,18,and 19th years)
F(A,i,n) = A*((1+i)^n-1)/i
= 25000( (1+0.08)^4 - 1)/(0.08)
= 112652.80
This is also the total deposit after eighteen years.
Step 2:
calculate the future value of the annual deposits D
A = D (total of annual deposits)
i = 8% (effective annual interest)
n = 18 years
Future value of deposits
F(A,i,n) = A*((1+i)^n-1)/i
= D( (1+0.08)^18 -1 ) / 0.08
= 37.45024373981167D
Since this must equal the total withdrawal, we equate the two to calculate D.
37.45024373981167D=112652.80
and solve for D
D = 112652.80 / 37.45024373981167
= $3008.0659
Step 3
Calculate monthly deposit, X
Effective interest rate is the actual interest paid at the end of the year AFTER compounding. Most credit cards charge x% ("APR", annual percentage rate)annually. Since it is compounded monthly, each month the balance increases by (x//12)%, and by the end of the year, you will be paying effectively (x//12)^12 %, which is the effective interest rate.
Here, effective (annual) interest rate is 8%. We need the monthly rate, i.
(1+i)^12 = 1.08
The actual monthly interest rate is therefore
i = 1.08^(1/12)-1
Over a 12 month period, (one year), the monthly amount X to accumulate an annual amount D (=$3008.0659) is therefore given by
D = X*((1+i)^n-1)/i
3008.0659 = X*(1.08-1)/(1.08^(1/12)-1)
or the monthly amount
X = $3008.0659 / ( 1.08^(1/12)-1)
= 241.925 per month.
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