Question

1. Suppose you are interested in purchasing an asset that costs $60,000, but you currently only have $45,000. If you can earn 6% compounded semi annually, how long will it take until you can afford to purchase the asset?

Answer 1

Here we will use the following formula:

FV = PV * (1 + r%)ⁿ

where, FV = Future value = $60000, PV = Present value = $45000, r = rate of interest = 6% compounded semi annually, so semi annual rate = 6% / 2 = 3%, n= time period = 30

now, putting theses values in the above equation, we get,

$60000 = $45000 * (1 + 3%)ⁿ

$60000 / $45000 = (1 + 0.03)ⁿ

1.33333 = (1.03)ⁿ

(1.03)^9.75 = (1.03)ⁿ

n = 7.5

So, it will take 7.5 years for us to afford the purchase of the asset.