Question

You want to invest $20,000 today to accumulate $32,000 for graduate school. If you can invest at an interest rate of 10% compounded annually. To find how many years will it take to accumulate the required amount, you would search the 10% column in the:

Answer 1

Answer:

N = 5 years

Explanation:

At first we have to calculate the number of periods to determine at which part of the table we should look at.

Given,

PV = $20,000

FV = $32,000

Interest rate, i = 0.10 (10%)

Number of periods, n = ?

We know, Future value, FV = PV × $(1+i)^{n}$

or, $32,000 = $20,000 × $(1 + 0.10)^{n}$

or, 1.6 = $1.10^{n}$

As the factor is 1.6, we will look at the following image which is the FV factor table to find the number of periods.

We can find it in a different way too.

log 1.6 = n log 1.10

or, n = $\frac{log 1.6}{log 1.10}$

or, n = 4.93 years

Therefore, n = 5 years