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?
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
Present value = Investment required today
Future value = $20,000.00
Rate = 6% = 0.06
Number of years = 5
Investment required today
= 20,000 / 1.06^5
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Learn more about this topic:
from Introduction to Business: Homework Help ResourceChapter 24 / Lesson 15