Suppose you need $20,000 to buy a new car in 5 years. Assume that you use an acc

Question

Suppose you need $20,000 to buy a new car in 5 years. Assume that you use an account earning 10%. What do you have to deposit today?
Options: A) $12,414.43 B) $12,416.43 C) $12,418.43 D) $12,420.43 E) none of the above Suppose you need $20,000 to buy a new car in 5 years. Assume that you use an account earning 10%. What do you have to deposit today?
Options: A) $12,414.43 B) $12,416.43 C) $12,418.43 D) $12,420.43 E) none of the above
Options: A) $12,414.43 B) $12,416.43 C) $12,418.43 D) $12,420.43 E) none of the above

Explanation / Answer

We have the future value F(v) i.e; $20,000

Time (t) is 5 years and

Rate of interest (r) or discount rate is 10%.

Then F(v)t = PV x (1+r)t

putting the values in formula = $20,000 = PV x (1+0.10)5

$20,000 = PV x 1.105

On rearranging the formula we get PV = 20,000 / 1.105

= $12,418.43

So, in order to buy a car worth $20,000 we need to deposit $12,418.43.

Correct answer is answer c

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