Question

Suppose you are committed to owning a $215,000 ferrari. if you believe your mutual fund can achieve an annual return of 10.8 percent, and you want to buy the car in 9 years on the day you turn 30, how much must you invest today? (do not round intermediate calculations and round your answer to 2 decimal places,
e.g., 32.16.)

Answer 1

Answer: I must invest $85424.14 today in order to buy a Ferrari nine years from now on the day I turn 30.

We have

Price of the Ferrari nine years from now (Future Value - FV)    $215000

Expected Rate of return on the mutual fund (r)    10.8%

Time until I turn 30  (n)   9 years

We can calculate the Present Value (PV) or the money to be invested today as

$\mathbf{PV = \frac{FV}{(1+n)^{n}}}$

$PV = \frac{215000}{(1+0.108)^{9}}$

$\mathbf{PV = 85424.14022}$