Question

Camila plans to go for vacation to Australia in 4 years from now. She estimates that she will need $27,125 for the trip. How much does she need to place in a saving account today that earns 9.04 percent per year (compounded quarterly) to accumulate this amount? Round the answer to two decimal places

Answer 1

Future value = Present value * [ 1 + (r/n) ]^nt

Here, $27,125 is the future value ( FV ) and we are asked to calculate what amount should be invested today i.e. Present value ( PV ) of $27,125

n = Number of compounding in a year = 4 ( as the compounding is done quarterly )

t = Number of years = 4 years

r = rate = 9.04% ( i.e. 0.0904 )

Now let us put the figures in the above formula

$27,125 = Present value * [ 1 + ( 0.0904 / 4 ) ]^4*4

Present value = $27,125 / [ 1 + ( 0.0904 / 4 ) ]¹⁶

Present value = $18,970.43