Question

Jack and Tracy would like to have $10,000 for a down payment on a new condo. A savings account at their local credit union will pay 2% per year compounded monthly. How much should they deposit now in this account to have the down payment in 3 years

Answer 1

Answer:

They should deposit $4,9,02 in the account.

Explanation:

Present value is the value of future cash flow in present term. The amount received in future have more value today than in future because of opportunity of reinvestment of cash flow.

Number of periods = 3 x 12 = 36 months

Present value = Future value  / ( 1 + r )^n

Present value = $10,000  / ( 1 + 0.02 )^36

Present value = $10,000   / 2.04

Present value = $4,902.23 = $4,902

Answer 2

Jack and Tracy should be depositing $9418 present value to have $10000 in their account at the end of three years at 2% interest compounded monthly.

How to calculate present value?

To calculate the present value of an annuity of $10000, we will use the given values in the formula below as,

$\rm Present\ Value= Future\ Value\ x\ \dfrac{1}{(1+r)^n}\\\\\rm Present\ Value= 10000\ x\ \dfrac{1}{(1+0.02)^3^6}\\\\\rm Present\ Value= \ 9418$

Hence, it can be said that the Jack and Tracy need to have $9418 present value of deposits in their savings account today to achieve their goal of $10000 for down payment of a new condo.

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