Question

Assume that you receive a check of $500 on your 25th birthday five years from now (Year 5). You plan to put that money in the bank at 3% interest. How much money will you have in the bank on your 30th birthday (Year 10) based on this investment? Do you have enough information to calculate the present values of this investment? Make reasonable assumptions if anything is missing.

Answer 1

The future value at 30th birthday is calculated below:

Future value = 500 x (1 + 0.03)^5

Future value = 500 x 1.15927

Future value = 579.64

The computed future value for the 30th birthday is $579.64

The present value is calculated below:

Present value = 500 / 1.03^5

Present value = 500 / 1.15927

Present value = 431.30

The computed present value for the 30th birthday is $431.30