Question

Joe and Mary expect to need a new washer and dryer in 4 years. They have $1,000 today and figure they will need $1,500 4 years from now. What interest rate will they need to earn to buy the washer and dryer?

Answer 1

The interest rate needed can be calculated with help of below PV - FV formula-

FV = PV ( 1 + r )ⁿ

where,

FV = future value

PV = present value

r = rate of interest

n = no. of years

Here,

FV = $1,500 , PV = $1,000 , n = 4 years

We need to find r.

FV = PV ( 1 + r )ⁿ

1500 = 1000 ( 1 + r)⁴

1500 / 1000 = ( 1 + r)⁴

1.5 = ( 1 + r)⁴

Taking 4th root of 1.5 , we get-

1.10668191970032 = 1 + r

r = 1.10668191970032 - 1

r = 0.10668192

= 10.67 % (approx)

Interest rate will they need to earn to buy the washer and dryer is 10.67 %

Hope it helps!