Joyce Thomas wants to buy a house in six years. She hopes to have $25,000 at that time. If the bank CD she wants to invest in will pay 7.5 percent annually, how much will she have to invest today? (Round to the nearest dollar.)

Question

Quizplus · Accepted Answer

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

FV = PV x (1 + r)n

Where: 
PV = present value (amount to be invested today)
r = annual interest rate
n = number of periods (in this case, 6 years)

We want to solve for PV, so we can rearrange the formula:

PV = FV / (1 + r)n

Plugging in the values:

PV = 25,000 / (1 + 0.075)6
PV = 16,198.54

Rounding to the nearest dollar, the answer is C) $16,199.

Joyce Thomas Wants to Buy a House in Six Years