Question

Steve own a $50,000 car. The annual rate of return is 12.3% and you want to buy the car in 5 years. How much must you invest today?

Answer 1

The cost of the car is $ 50,000. We assume the cost of car we want to own is the same after 5 years.

We need $50,000 after 5 years and we are getting an annual rate of return of 12.3%.

Thus, Future Value = FV = 50,000

rate of return = r = 12.3% per year

tenure = n = 5 years

and we have to find the present value to be invested.

Future Value = Present Value * 1 / (1+r)n

50,000 = PV * 1/ (1+0.123)5

50,000 = PV * 1.7861

PV = 50,000 / 1.7861

PV = Present Value = 27,994.40.

Thus, we need to invest $ 27,994.40 today at the rate of 12.3% to buy a car of $50,000 after 5 years.