(Ignore income taxes in this problem.) 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?
A)$2,535
B)$2,835
C)$2,000
D)$5,000

Question

Quizplus · Accepted Answer

We can use the future value formula to solve this problem:

FV = PV x (1 + r)^n

Where: 
PV = present value (amount James needs to deposit now) 
r = rate of return (12%) 
n = number of periods (5 years) 
FV = future value (amount James needs in five years)

Plugging in the given values, we get:

$5,000 = PV x (1 + 0.12)^5

Solving for PV, we get:

PV = $2,835

Therefore, James needs to deposit $2,835 now to have $5,000 in five years. Option B is the correct answer.

(Ignore Income Taxes in This Problem