Question

1. How much would you have to deposit to have $20,000 in 25 years, if the discount rate is 8%? 2. If you want to have $50,000 in 5 years and you can earn 8% by investing in Apple stock, how much would you have to deposit today? 3. If you think you can sell your classic car for 100,000 in five years and you think the appropriate discount rate is 10%. What is the value of this classic car?

Answer 1

Formula to be used

Future Value = Present Value (1 + i)^n

or

Present Value = Future Value * PV of $1(i,n)

where i is the rate of interest and

n is the number of years

1)

Future Value = $20,000

Time years = 25 years

Rate of interest = 8%

Present Value = Future Value * PV of $1 (8%,25years)

= $20,000 * 0.146

= $2,920

Therefore, $2,920 have to be invested now to have $20,000 in 25 years.

2)

Future Value = $50,000

Time years = 5 years

Rate of interest = 8%

Present Value = Future Value * PV of $1 (8%,5years)

= $50,000 * 0.681

= $34,050

Therefore, $34,050 have to be invested now to have $50,000 in 5 years.

3)

Future Value = $100,000

Time years = 5 years

Rate of interest = 10%

Present Value = Future Value * PV of $1 (10%,5years)

= $100,000 * 0.621

= $62,100

Therefore, value of classic car that could fetch $100,000 in 5 years at 10% discount rate is $62,100.

Present value table has been used to obtain present value of $1, upto 3 decimal places are considered.