Question

Sara wants to have $500,000 in her savings account when she retires. How much must she put in the account now, if the account pays a fixed interest rate of 8%, to ensure that she has $500,000 in 20 years time.

1. $231,480

2. $180,884

3. $144,616

4.$107,274

Helen is saving to start a business. If she invests $10,000 in a savings account now, which of the following is the minimum interest rate required to ensure that she has $25,000 in her account in ten years time?

a. 10.2%

b. 9.6%

c. 2.5%

d. 6.4%

Answer 1

1.Information provided:

Future value= $500,000

Time= 20 years

Required rate of return= 8%

The question is solved by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 500,000

N= 20

I/Y= 8

Press the CPT key and PV to compute the present value.

The value obtained is 107,274.10.

Therefore, Sara must deposit $107,274 to have $500,000 in 20 years.

Hence, the answer is option 4.

2.Information provided:

Face value= $25,000

Present value = $10,000

Time= 10 years

Enter the below in a financial calculator to calculate the interest rate:

FV= 25,000

PV= -10,000

N= 10

Press the CPT key and I/Y to compute the interest rate.

The value obtained is 9.5958.

Therefore, the interest rate is 9.6%.

Hence, the answer is option b.