Assume that the desired rate of return is 10% and that interest is compounded annually. Identify how much must be invested today to have $10,000 in 5 years and 10 years, respectively.

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Quizplus · Accepted Answer

To find out how much must be invested today to have a certain amount in the future, we use the formula for the present value of a single sum, which is PV = FV / (1 + r)^n, where PV is the present value (amount to invest today), FV is the future value ($10,000), r is the annual interest rate (10% or 0.10), and n is the number of years. For 5 years, PV = $10,000 / (1 + 0.10)^5 = $10,000 / (1.61051) ≈ $6,209. For 10 years, PV = $10,000 / (1 + 0.10)^10 = $10,000 / (2.59374) ≈ $3,855.

Assume That the Desired Rate of Return Is 10% and That