You want to travel to Europe to visit relatives when you graduate from college three years from now. The trip is expected to cost a total of $10,000. Your parents have deposited $5,000 for you in a CD paying 6% interest annually, maturing three years from now. Aunt Hilda has agreed to finance the balance. If you are going to put Aunt Hilda's gift in an investment earning 10% annually over the next three years, how much must she deposit now so you can visit your relatives in three years?

Question

Quizplus · Accepted Answer

To find out how much Aunt Hilda needs to deposit now, calculate the future value of the $5,000 CD and subtract it from the total cost. Then, calculate the present value of the remaining amount using the 10% interest rate. The future value of the CD is $5,000 * (1 + 0.06)^3 = $5,955.08. The remaining amount needed is $10,000 - $5,955.08 = $4,044.92. The present value of $4,044.92 at 10% for three years is $4,044.92 / (1 + 0.10)^3 = $3,039.

You Want to Travel to Europe to Visit Relatives When