You would like to have $50,000 for a new car in six years. If you deposit money today in a bank CD that pays 4% per year, how much must your deposit be?

Question

Quizplus · Accepted Answer

We can use the formula for future value of a single sum:

FV = PV * (1 + r)^n

where FV is the future value, PV is the present value, r is the interest rate per period, and n is the number of periods.

In this case, we want to have $50,000 in six years, so n = 6. The interest rate is given as 4% per year, so r = 0.04. We want to find PV, which is the deposit we need to make today.

Plugging in the numbers, we get:

$50,000 = PV * (1 + 0.04)^6

$50,000 = PV * 1.26247

PV = $39,516.23

So the closest answer choice is B, $39,516.

You Would Like to Have $50,000 for a New Car