Question

How much would you need to deposit in an account now in order to have $4000 in the account in 10 years? Assume the account earns 2% interest compounded monthly.

Answer 1

Sol:

Future value (FV) = $4,000

Interest rate (r) = 2%, Monthly = 2%/12 = 0.001667

Period (n) = 10 years, Monthly = 10 x 12 = 120

To determine Present value (PV)

PV = FV / (1+r)^n

PV = 4000 / (1 + 0.001667)^120

PV = 4000 / (1.001667)^120

PV = 4000 / 1.221199

PV = $3,275.47

Therefore you have to deposit $3,275.47 now to have $4000 in your account after 10 years.

Alternatively we can use PV function in excel sheet:

FV	$4,000
Interest rate	0.001667
Period	120
PV	$3,275.47

Working

A B 1 FV 4000 2 Interest rate 52%/12 3 Period =12*10 4 PV =PV(B2,B3,0,B1)-1