Question

3. You wish to purchase a $40,000 new car in 5 years. If interest is paid at a 7.5% annual rate, compounded monthly, what lump sum would you need to deposit into your account today in order to have the $40,000 after 5 years ?

Answer 1

solution:

the given information as follows:

Future value or Amount (A) = $ 40,000

interest rate (r) = 7.5% annually

time period (t) = 5 years

since the interest is counpounded monthly so, n denotes the number of time the interest is coumpounded in a year, so, n = 12

the formula for calculation of principal is as follows:

$P=\frac{A}{\left ( 1+\frac{r}{n} \right )^{nt}}$

40,000 P= 27524 5*12 (1 + 7.5 12*100

so, lumpsum amount need to deposit into account = $ 27,524