Question

imagine the you have $5,000 for a down payment on a car, but you need $8,000. You have a trusted friend who is financially savvy and assures you that you can earn 7% on your investments. How many years will it take for your $5,000 to grown to $8,000? (I hope you recognize that this is a future value of a lump sum problem and, in terms of the A = B x C method, that you know A, B, and part of C.) Round to the nearest whole number of years.

A. 3

B. 5

C. 7

D. 9

E. 11

Answer 1

Present value = Future value/(1+i)^n

i = interest rate per period

n= number of periods

=>

5000 = 8000/(1+7%)^n

=>

n = ln(8000/5000)/ln(1.07)

= 6.95 years

= 7 years

choose C)