Question

You will need $25,000 to start your business in 7 years.   

A) If you can earn 5% on an initial investment, how much will you have to deposit today?

B) What if you want to start in 5 years, instead of 7 years?

C) What if you can earn 7% instead of 5%?

Answer 1

If we need $25,000 to start your business in 7 years, then to calculate the deposit today we need to calculate the Present value of that sum.

A) If we earn 5% on an initial investment, then amount we must have today will be:

Present Value as on today : $ Future value / ( 1 + rate of interest)^years

Present Value as on today : $ 25,000 / ( 1 + 0.05)⁷

Present Value as on today : $ 17,767.03

B) If we want to start in 5 years, instead of 7 years, then amount we must have today will be:

Present Value as on today : $ Future value / ( 1 + rate of interest)^years

Present Value as on today : $ 25,000 / ( 1 + 0.05)⁵

Present Value as on today : $ 19,588.15

C) If we can earn 7% instead of 5%, then amount we must have today will be:

Present Value as on today : $ Future value / ( 1 + rate of interest)^years

Present Value as on today : $ 25,000 / ( 1 + 0.07)⁷

Present Value as on today : $ 15,568.74