Question

Your grandpa wants to present you with a small apartment on your 30thbirthday. The apartment is expected to cost $400,000 then. He wants to invest in a 10 year CD (certificate of deposit) on your 20thbirthday so that it grows to be $400,000 on your 30thbirthday. What is amount should he deposit, if the CD pays an interest rate of 8% per annum, and the tax rate on interest income is 25%?

Answer 1

Adjusted return after tax = Return*(1-tax rate)
Return =8%
Tax=25%

Adjusted return = 8%(1-0.25)=6% or 0.06

Now Future Value= Present Value (1+r)^n

r=0.06
n=10

Future Value =$400,000

Hence

400,000=PV*(1.06^10)
PV=$223,357.91

Hence Granpa shall deposit $223,357.91