Your family plans to spend $25,000 on a car for you upon graduation from college.If you will graduate in three years and your family can earn 3.125% annually on their investment,how much money must they set aside today for your car?

Question

Quizplus · Accepted Answer

Using the formula for present value of a future amount: 
Present Value = Future Value / (1 + interest rate)^number of years

PV = 25,000 / (1 + 0.03125)^3
PV = 25,000 / (1.1025)
PV = 22,659.09

Therefore, the family must set aside $22,659.09 today for the car. The closest answer choice is C) $22,795.45, which is off by a small amount due to rounding.

Your Family Plans to Spend $25,000 on a Car for You