Question #26704

John intends to invest a certain sum of money today in order to earn a return of $6 000 in five years time. how much should john invest today at the interest rate of 7%, compounded annually? would you advise john to proceed with the transction or not? kindly motivate your position.

Expert's answer

FV = PV*(1 + i)^n, where FV - future value, PV - present value, i - interest rate, n - number of years.

In our case, FV = PV + 6000, so we get:

PV + 6000 = PV*1.07^5

1.4026PV - PV = 6000

0.4026PV = 6000

PV = 6000/0.4026 = $14,904.92

We advice John to proceed with this transaction, as he will gain the significant profit. But if he has another more attractive offer, it's better not to proceed with this.

In our case, FV = PV + 6000, so we get:

PV + 6000 = PV*1.07^5

1.4026PV - PV = 6000

0.4026PV = 6000

PV = 6000/0.4026 = $14,904.92

We advice John to proceed with this transaction, as he will gain the significant profit. But if he has another more attractive offer, it's better not to proceed with this.

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