Question

Today, you invest a lump sum amount in an equity fund that provides an 8% annual return. You would like to have $11,700 in 6 years to help with a down payment for a home. How much do you need to deposit today to reach your $11,700 goal? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

Answer:

$7,372.99

Explanation:

Discounting is the method used to determine the present worth of a future amount which compounding is used to determine the future worth of a present amount. The relationship between both is such that;

Fv = Pv(1 + r)^n

where

Fv = future amount

Pv = present amount

r = interest rate and

n = time

The future amount = $11,700

time = 6 years

rate = 8%

$11,700 = Pv(1 + 0.08)^6

Pv = $11,700(1 + 0.08)^-6

Pv = $7,372.99

You need to deposit $7,372.99 today to reach your $11,700 goal in 6 years.