Heather deposits $8 000 in an investment account that offers 5% interest per year. The interest is due in 5 years. Annual inflation is expected to be 4% over the next 5 years. Heather's actual MARR per six-month period is 5%, compounded semiannually. What is the present worth of the interest?

Question

Quizplus · Accepted Answer

The interest earned over 5 years is $8,000 * 5% = $400 per year. Over 5 years, this is $400 * 5 = $2,000. To find the present worth of this interest, we discount it using the actual MARR of 5% per six-month period, compounded semiannually. The present worth factor for 10 periods (5 years) at 5% per period is (1 + 0.05)^-10. The present worth of $2,000 is $2,000 * (1 + 0.05)^-10 = $1,357.

Heather Deposits $8 000 in an Investment Account That Offers