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If a person needs $20,000 in 5 years from now and interest rates are currently 6%, how much do...

Question:

If a person needs $20,000 in 5 years from now and interest rates are currently 6%, how much do they need to invest today if interest is compounded annually?

a) $14,945.

b) $14,683.

c) $15,301.

Present value:

Present value refers to the current value of any sum of money to be received after a certain period of time. It is found out by discounting the future value at a given interest rate for a certain period of time.

Answer and Explanation:

The correct choice is Option A.

As per time value of money,

Present value = Future value / (1 + Rate)^Number of years

Here,

Present value = Investment required today

Future value = $20,000.00

Rate = 6% = 0.06

Number of years = 5

So,

Investment required today
= 20,000 / 1.06^5
= $14,945.16


Learn more about this topic:

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How to Calculate Present Value of an Investment: Formula & Examples

from Introduction to Business: Homework Help Resource

Chapter 24 / Lesson 15
42K

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