Question

You need to have $32,750 in 5 years. You can earn an annual interest rate of 6 percent for the first 3 years, and 6.6 percent for the next 2 years. How much do you have to deposit today?

Answer 1

Answer:

The initial deposit today must be $24,197.99

Explanation:

We need $ 32,750 in Five years it means we have to calculate the present value of this value

Years                   PVF of $ 1   Remarks    

Year 1                    0.94340 =1 / 1.06    

Year 2                    0.89000 Year 1 Value /1.06    

Year 3                    0.83962 Year 2 Value /1.06    

Year 4                    0.78764 Year 3 Value /1.066    

Year 5                    0.73887 Year 4 Value /1.066    

Present Value of investment = PVF of $ 1 at the end of 5th year X $ 32,750  

Present Value of investment =     0.73887 X  $ 32750  

Present Value of investment =$ 24,197.99    

Answer = $ 24,197.99