Question

If you need to have $800 in savings at the end of 4 years and your savings
account yields 5% annual interest, how much do you need to deposit today?

Answer 1

The amount needed to deposit is $658.16. The present value of cash inflows and outflows over time is called net present value.

What is a Present Value?

The Present value is the current value of a future sum of money that has been discounted by a rate of return is called the present value. It informs you of the amount you'd have to put in today to earn a particular sum tomorrow. The difference between the present value of cash inflows and outflows over time is called net present value.

Given;

Future Value = $800

interest = 5%

Time = 4 years

Calculation of Present Value = Future Value divides by (1+interest)ⁿ

                                                 = 800/ (1+0.05)⁴

                                                 = $658.16

Thus, The Present value is the current value of a future sum of money $658.16 is needed to save to get $800 at the end of 4 years at the rate of 5%.

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