You are currently entering college and you want to buy your uncle's Mercedes when you graduate. He has promised to sell it to you for $18,000. How much will you have to deposit now, in an account earning 8%, to have enough money to buy the car in 4 years?
A) $6,122
B) $4,500
C) $13,230
D) $3,060

Question

Quizplus · Accepted Answer

We need to use the formula for future value of a present sum with compound interest: FV = PV(1+r)^n, where FV is the future value, PV is the present value, r is the interest rate, and n is the number of years. Plugging in the values we know, we get:
FV = $18,000
PV = ?
r = 8% = 0.08
n = 4
$18,000 = PV(1+0.08)^4
Solving for PV, we get $13,230. This is the amount you need to deposit now to have enough money to buy the car in 4 years. Therefore, the best choice is C.

You Are Currently Entering College and You Want to Buy