Question

Olivia wants to have $5000 to upgrade her VW bus in 2 years.

How much must she deposit now in a savings account that pays 18 percent compounded monthly to have the money she needs in 2 years?

Answer #1

Amount required to have in 2 years = $5,000

Interest rate (R) = 18%

Interest compounded monthly.

So, number of compounding periods = 2 years * 12 months = 24 months

Present value * [1 + (R / n)]^{n * T} = Future value

Present Value * [1 + (0.18 / 12)]^{12 * 2} = $5,000

Present value * [1.015]^{24} = $5,000

Present value * 1.4295028 = $5,000

Present value = $3,497.72

She should deposit **$3,497.72** in a savings
account which earns 18% compounded monthly in order to have $5,000
in 2 years

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