How much money must be invested into an account paying 4 1/2 annually, compounde

Question

How much money must be invested into an account paying 4 1/2 annually, compounded annually, to have $600,000 in 25 years when I retire? Calculate the PV (present Value) using the *present Value of 51.00* table in your textbook. Remember: To use Table 13-3, you need the Number of periods and the interest Rate per period. Calculate the PV (Present value) using the formula PV = FV/(1 + R) Reminder: Always show work you can do this by stating the values that you are substituting into the formula how much interest did you earn over the of the investment? you can use either the result from part 4a or part 4b for your calculators, since they are slightly different. Show your work.

Explanation / Answer

Maturity amount or future value of investment FV= $ 600,000

Annual Interest rate R = 4% or 0.04 compounded annually

Investment period n = 25 years

Initial investment amount or Prevent Value of investment PV =?

Therefore PV of Future Value $ 600,000 = PV factor * FV = 0.37512 * $ 600,000 = $ 225072

Where,

future value of investment FV= $ 600,000

Annual Interest rate R = 4% or 0.04 compounded annually

Investment period n = 25 years

Therefore PV = $ 600,000* / (1+0.04)^25

= $ 225070.08

From part (a) = $ 600,000 - $ 225072 =$ 374,928

From part (b) = $ 600,000 - $ 225070.08 =$ 374,929.92

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