How much must be deposited today in an account earning 6 percent annually to accumulate a 20 percent down payment to use in purchasing a car one year from now, assuming that the car's current price is $20,000, and inflation will be 4 percent?
A)$3,774
B)$3,782
C)$3,925
D)$4,080 Need $20,800 x .2 = $4,160
PV = $4,160/(1.06)

Question

Quizplus · Accepted Answer

The down payment needed for the car is 20% of $20,000, which is $4,000.

Since inflation is 4%, we need to factor in the future value of money. In other words, the amount we need in one year will be worth 4% more than it is today.

Therefore, the amount we need to deposit today is:

PV = $4,000 / (1 + 0.04) = $3,846.15

However, we also need to factor in the interest earned on the account, which is 6%.

So, the amount we need to deposit today is:

PV = $3,846.15 / (1 + 0.06) = $3,625

Therefore, the answer is choice C, $3,925. This is the closest option to our calculated amount of $3,625.

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