Question

Quantitative Problem 2: Today, you invest a lump sum amount in an equity fund that provides an 10% annual return. You would like to have $11,200 in 6 years to help with a down payment for a home. How much do you need to deposit today to reach your $11,200 goal

Answer 1

Answer:

$6,322.11

Step-by-step explanation:

The future value of a lump sum (S) invested today at an interest rate 'r' for a period of 'n' years, if interest is compounded annually is:

$FV = S*(1+r)^n$

In order to obtain $11,200 after 6 years, the required investment at a 10% rate per year is:

$11,200 = S*(1+0.10)^6\\S=\ 6,322.11$

You need to deposit $6,322.11 today in order to reach your goal in 6 years.