Question

If you want to accumulate $500,000 in 20 years, how much do you need to deposit today that pays an interest rate of 15%?

Answer 1

The answer is $125,000. At that deposit and with 15% interest, you get $18,750 annually. You multiply that by 20 years and that gets you $375,000 from interest plus the original $125,000: which gives you the desired amount of $500,000 after 20 years of 15% interest.

Answer 2

$125,000.

Explanation:

We are asked to find the principal amount which pays an interest rate of 15% to accumulate $500,000 in 20 years.

We will use simple interest formula to solve our given problem:

`A=P(1+rt)`, where,

A = Amount after t years,

P = Principal amount,

r = Annual interest rate in decimal form,

t = Time in years.

Upon substituting our given values in above formula, we will get:

`\$500,000=P(1+0.15*20)`

`\$500,000=P(1+3)`

`\$500,000=P*4`

`4P=\$500,000`

`(4P)/(4)=(\$500,000)/(4)`

`P=\$125,000`

Therefore, you should deposit $125,000 to accumulate $500,000 in 20 years.