Question

You are saving money for a down payment on a house. Suppose you want to have total savings of $20,000 in 10 years time and you have currently $5,000. What annual interest rate do you need to earn on your initial investment, assuming you contribute no additional savings?

Answer 1

Answer:

14.87%

Explanation:

we have to use the future value formula to solve this question:

future value = present value x (1 + rate)ⁿ

you need to save $20,000 in 10 years (this is your future value)

currently you have $5,000 which will be $5,000 x (1 + r)¹⁰

$20,000 = $5,000 x (1 + r)¹⁰

(1 + r)¹⁰ = $20,000 / $5,000

(1 + r)¹⁰ = 4

¹⁰√(1 + r)¹⁰ = ¹⁰√4

1 + r = 1.1487

r = 1.1487 - 1

r = 0.1487 = 14.87%