Use the formula for present value of money to calculate the amount you need to invest now in one lump sum in order to have 25,000 after 10 years with an APR of 8% compounded monthly. Round your answer to the nearest cent, if necessary.

Solution

U se t h e f or m u l a f or p rese n t v a l u e o f m o n ey t o c a l c u l a t e t h e am o u n t yo u n ee d t o in v es t n o w in o n e l u m p s u m in or d er t o ha v e 25, 000 a f t er 10 ye a rs w i t h an A PR o f 8% co m p o u n d e d m o n t h l y . R o u n d yo u r an s w er t o t h e n e a res t ce n t, i f n ecess a ry .

Amount : 2.22

Solution steps

Translate the problem into an equation:

A = 1 \cdot (1 + \frac{0.08}{12})^{12 \cdot 10}

1 \cdot (1 + \frac{0.08}{12})^{12 \cdot 10} = 2.21964 \dots

Round to the nearest hundredth:

2.22

Amount : 2.22