Question

(Ignore income taxes in this problem.) James just received an $8,000 inheritance check from the estate of his deceased uncle. James wants to set aside enough money to pay for a trip in five years. If the trip is expected to cost $5,000 and the rate of return is 12 percent per year, how much of the $8,000 must James deposit now to have the $5,000 in five years

Answer 1

Answer:

  $2837.13

Explanation:

The account value is multiplied by 1 +12% = 1.12 each year, so at the end of 5 years, it will have been multiplied by 1.12^5. For some investment P, we want ...

  5000 = P×1.12^5

  5000/1.12^5 = P ≈ $2837.13

James must deposit about $2837.13 now to have the required amount in 5 years.