Question

3. To buy a retirement home, you will need $370,000 at the end of 16 years. If funds can be invested at an effective return of 8 percent a year, how much must you invest today to have the needed amount? The amount needed to invest today is

Answer 1

This question is based on the concept of present value calculation.
Amount needed to Invest today				=	Home cost in 16 Years x Present value of 1 to be paid in Year 16
				=	$       3,70,000	x	0.29189
				=	$       1,07,999
Working;
Present value of 1 to be paid in 16 years				=	(1+i)^-n		Where,
				=	(1+0.08)^-16		i	8%
				=	0.29189		n	16