Question

2. A bank offers a savings account with a 6% annual interest rate, compounded monthly. Stu wants to open a savings account and make one deposit now that will enable him to withdraw $700 to go on vacation 5 months from now and $2000 for a deposit on a rental apartment when he starts working in 3 years from now. How much money does Stu need to deposit now

Answer 1

2354.048

Step-by-step explanation:

To calculate the Present Value we need to use the Present Value formula

Present Value = Future Value (1/1+Required Return)^number of periods

Required return = 0.5%.

For the vacation,

Present Value = 700/1.005^5

Present Value = 682.759.

Similarly, for rent,

Present Value = 2000/1.005^36

Present Value = 1671.289.

Hence, the total amount will be = 1671.289 + 682.759 = 2354.048