You need $8,000 four years from now for a down payment on your future house. How much money must you deposit today if your credit union pays 5% interest compounded annually? Pick the closest answer.
A) $6,269.59
B) $6,578.95
C) $6,394.12
D) $6,189.83

Question

Quizplus · Accepted Answer

To find out how much money you need to deposit today, we need to use the formula for compound interest:

A = P(1+r/n)^(nt)

Where:
A = the future value (amount you need in 4 years)
P = the principal (amount you need to deposit today)
r = the annual interest rate (5%)
n = the number of times the interest is compounded per year (once annually)
t = the number of years (4)

Plugging in the values:

$8,000 = P(1+0.05/1)^(1*4)

$8,000 = P(1.05)^4

$8,000/1.05^4 = P

$6,578.95 ≈ P

Therefore, you need to deposit approximately $6,578.95 today to have $8,000 in 4 years with 5% interest compounded annually. The closest answer choice is B.

You Need $8,000 Four Years from Now for a Down