Firstly, convert the interest rate from a percentage to a decimal format by dividing it by hundred. Therefore, 14% becomes 0.14.
We use a formula for calculating the present value in financial mathematics. Here's the formula:
P = A / (1 + r) ^ t
where:
- P represents the present value;
- A, the future amount that a sum of money will grow to after compounding interest;
- r, the interest rate;
- t, the time period
In this case, the given values are A = $5000, r = 0.14 and t = 3 years.
Let's insert these values into the formula:
P = 5000 / (1 + 0.14) ^ 3
Step by step, this is what the equation looks like:
First, add 1 to 0.14 to get 1.14. Then raise 1.14 to the power of 3. Taking this value, you can divide 5000 by it to find out the present value, P.
After performing the calculations, the present value, P, turns out to be approximately $3374.86.
Therefore, if you invest approximately $3374.86 today at an annual interest rate of 14%, after 3 years it will grow to $5000.