Suppose you are committed to owning a $194,000 Ferrari. If you believe your mutu

Question

Suppose you are committed to owning a $194,000 Ferrari. If you believe your mutual fund can achieve a 11 percent annual rate of return and you want to buy the car in 8 years on the day you turn 30, how much must you invest today? ( Round 2 decimal place)

Suppose you are committed to owning a $194,000 Ferrari. If you believe your mutual fund can achieve a 11 percent annual rate of return and you want to buy the car in 8 years on the day you turn 30, how much must you invest today? ( Round 2 decimal place)

Explanation / Answer

Price of Ferrari = $ 194000 and Annual Rate of Return = 11 %

Investment Tenure = 8 years

Let the current investment be $ K

If the person has to buy the Ferrari through an investment in mutual funds with an annual return of 11%, then the future value of the investment K after 8 years should be equal to $ 194000 (price of the Ferrari) compounded at the mutual fund annual return rate of 11%.

Therefore, K x (1.11)^(8) = 194000

K = $ 84181.74 approximately.

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