Question

Suppose you are still committed to owning a $190,000 BMW (see Question 9). If you believe your mutual fund can achieve a 12% annual rate of return and you want to buy the car in nine years on the day you turn 30, how much must you invest today?

Answer 1

The amount of money which you must invest today is equal to $68,517.85.

How to calculate the present value?

Mathematically, the present value of an investment can be calculated by using this formula:

Present Value, PV = FV/(1 + r)^t

Given the following data:

Time, t = 9 years.

Future value, FA = $190,000.

Interest rate, r = 12% = 0.12.

Substituting the given parameters into the formula, we have;

PV = 190,000/(1 + 0.12)^9

PV = 190,000/(1.12)^9

PV = 190,000/2.7730

PV = $68,517.85.

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