Question

Adam wishes to have $16,000 available in 18 yrs to purchase a new car for his son. To accomplish this goal, how much should adam invest now in a CD that pays 1.24% interest compounded monthly?

Answer 1

Amount Adam need to invest = $12,802.04

Explanation:

In the question,

Amount Adam want to have in 18 years = $16,000

Time, t = 18 years

Rate of interest, r = 1.24% (compounded monthly)

So,

Effective rate of return, R = 1.24/12=0.1033%

Effective time, T = 18 x 12 = 216 years

Now,

Let us say the amount invested in the CD is = x

So,

Using the formula of Compound Interest, we can say that,

`16000=x(1+0.00103)^(216)\\x=(16000)/(1.00103^(216))\\x=(16000)/(1.2498)\\x=\$12,802.04`

Therefore, the amount Adam need to invest in the CD to achieve the Goal is,

$ 12,802.04.