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Brief Exercise 6-2
Tony Bautista needs $23,160 in 2 years. (Use the tables below.)
What amount must he invest today if his investment earns 12% compounded annually? What amount must he invest if his investment earns 12% annual interest compounded quarterly? (Round factor values to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g. 458,581.)
| Investment at 12% annual interest | $ |
|
| Investment at 12% annual interest, compounded quarterly | $ |
Expert Answer
1.We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.
Hence
23160=P(1.12)^2
Hence P=$23160/1.12^2
=$23160/1.2544
=$18,463(Approx).
2.We use the formula:
A=P(1+r/400)^4n
where
A=future value
P=present value
r=rate of interest
n=time period.
23160=P(1+12/400)^(4*2)
Hence
P=$23160/1.03^8
=$23160/1.26677
=$18283(Approx).
