You want to buy a Volvo in seven years. The car is currently selling for $50,000, and the price will increase at a compound rate of 10% per year. You can presently invest in high-yield bonds earning a compound annual rate 14% per year. How much must you invest at the end of each of the next seven years to be able to purchase your dream car in seven years?
A) $8,831.46
B) $9,080.20
C) $9,125.42
D) $9,282.09

Question

Quizplus · Accepted Answer

First, we need to calculate how much the car will cost in seven years:
$50,000 x 1.10^7 = $1,28226.81

Next, we need to calculate how much we need to invest each year in order to have $128,226.81 in seven years:
PV = 0, PMT = ?, FV = $128,226.81, n = 7, i = 14%

Using the PMT function on a financial calculator, we get the answer of $9,080.20.

You Want to Buy a Volvo in Seven Years