Question

Suppose you want to save up $2,173 in 5 years to treat yourself to a vacation after 5 years of hard work to graduate from college. If your bank offers you 12% APR, how much will you have to deposit today to have the money in 5 years? (Round your answer to two decimal points)

Answer 1

To save $ after 5 years, you shoul deposit present value of $ after 5 years at 12% in bank

the present value of $2173 is calculated as follows,

PV = $2173 * Pv factor for 5 years @ 12%

Pv factor @ 12 % for 5 years = $1/(1+0.12)^5$

= $1/(1.12)^5$

= 1/1.76234

= 0.5674

Therefore, the amount to be deposited in bank today = $2173 * 0.5674 = $1232.96

Note : pv factor is a rounded figure....so the amount can have slight variations according to  the number of decimal digits you take.

thank you