Question

Use the compounding or discounting formula to answer the questions. Round answers to the nearest dollar. a. Your small business has a cash reserve of $200,000, earning 2% annual interest. How much will your cash reserve be worth in 3 years? $ b. You want $1 million in your retirement account in 50 years. If your account grows at an annual rate of 4%, how much do you have to deposit today to reach $1 million in 50 years?

Answer 1

Answer:

a.

Future value - Cash Reserve = $212241.6

b.

Present value of deposit = $140712.615333 rounded off to $140712.62

Explanation:

a.

To calculate the value of cash reserve in 3 years, we will calculate the future value of the cash flow using the following formula,

Future value = Present value * (1 + r)^t

Where,

• r is the rate of interest or return
• t is the number of periods

Future value - Cash Reserve = 200000 * (1+2%)^3

Future value - Cash Reserve = $212241.6

b.

To calculate the amount of deposit today, we need to calculate the present value of $1 million which are after 50 years from today. The formula to calculate the present value is as follows,

Present Value =  Future value / (1 + r)^t

Where,

• r is the interest rate or rate of return or discount rate
• t is the number of periods

Present value = 1000000 / (1+4%)^50

Present value = $140712.615333 rounded off to $140712.62