Question

Present Value Hoew much shuold be deposited in an account paying 7.8% interest compounded monthly in order to have a balance of $21,000 after 4 years?

Answer 1

Answer: $15385 should be deposited.

Step-by-step explanation:

The principal was compounded monthly. This means that it was compounded 12 times in a year. So

n = 12

The rate at which the principal was compounded is 7.8%. So

r = 7.8/100 = 0.078

It was compounded for 4 years. Therefore,

t = 4

The formula for compound interest is

A = P(1+r/n)^nt

A = total amount in the account at the end of t years. The total amount is given as $21000. Therefore

21000 = P (1+0.078/12)^12×4

21000 = P (1+0.078/12)^48

21000 = P (1+0.0065)^48

21000 = P (1.0065)^48

P = 21000/1.365

P = $15385