Your parents agree to pay half of the purchase price of a new car when you graduate from college. You will graduate and buy the car two years from now. You have $6,000 to invest today and can earn 10% on invested funds. If your parents match the amount of money you have in two years, what is the maximum you can spend on the new car?
A) $7,260
B) $11,948
C) $12,000
D) $13,250
E) $14,520

Question

Quizplus · Accepted Answer

First, calculate the future value of the $6,000 investment after two years with a 10% annual interest rate, using the formula for compound interest: FV = PV * (1 + r)^n, where FV is the future value, PV is the present value ($6,000), r is the annual interest rate (10% or 0.10), and n is the number of years (2). So, FV = $6,000 * (1 + 0.10)^2 = $6,000 * 1.21 = $7,260. This is the amount you will have in two years. Since your parents are matching this amount, the total amount available to spend on the car is $7,260 (your savings) + $7,260 (parents' contribution) = $14,520.

Your Parents Agree to Pay Half of the Purchase Price