2. What amount must be invested today at an annual interest rate of 6% if you wa

Question

2. What amount must be invested today at an annual interest rate of 6% if you want to purchase a $550,000 machine five years in the future? (Textbook Problems 2.5) a) What is the number of time periods (n) you should use in solving this problem? b) What rate of interest (i), per period of time, should be used in solving this problem? c) Is the present single amount of money (P) known? (Yes or No) d) What is the desired future amount? e) Which time value factor should be used to solve this problem? f) What is the total amount that must be invested today?

Explanation / Answer

Solution: The problem leads to the following formula = P(rate of interest)time period = 550000

Therefore P(1.06)5 = 550000

P = 550000/1.34

P = $413534 approx.

a.) number of time periods used = 5

b.) 6% per annum

c.) no this is what we found.

d.) $550000

e.) Time value in year is used.

f.) $413534 must be invested today.

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