Question

James just received an $8,000 inheritance check from the estate of his deceased rich uncle. James wants to set aside enough money to pay for a trip in five years. If the trip is expected to cost $5,000, how much of the $8,000 must James deposit now if the rate of return is 12% per year in order to have the $5,000 in five years

Answer 1

$2831.13

Explanation:

The computation of the present value of 5,000 in five years is shown below:-

Present Value of 5,000 in five years = Expected cost ÷ (1 + Rate of return)^Number of years

= $5,000 ÷ (1 + 12%)^5

= $

5,000 ÷ (1.12)^5

= $2831.13

Therefore for computing the present value of 5,000 in five years we simply applied the above formula.