Question

Jazelle Momba wants to visit her family in Zimbabwe in 2022, which is 8 years from now. She knows it will cost approximately $7,000 including flight costs, on-the-ground costs, and extra spending money to stay for 4 months. If she opens an account that compounds interest at 6% semiannually, how much does she need to deposit today to cover the total cost of her visit ?

Deposit $_________

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Answer 1

Solution:

The question is related to time value of money i.e. present value and future value of amount.

Here,

Rate of Interest (R) = 6%

Interest Compounded Semi annually, hence we need to calculate Semi Annual Interest Rate = 6/2 = 3%

Number of time interest to be paid during the period (i.e. in 8 years) = 8*2 = 16 times

Future Value of Deposit Amount = $7,000

Future Value of Amount = Present Value x (1 + R)ⁿ

$7,000 = Present Value x (1 + 0.03)¹⁶

$7,000 = Present Value x 1.604706

Present Value = $7,000 / 1.604706 = $4,362.17

So, Jamella Momba needs to deposit today $4,362.17 to cover the total cost of her visit.

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