You want to travel to Europe to visit relatives when you graduate from university 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 high interest account,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 must deposit now, we need to calculate the present value of the remaining amount needed after the $5,000 grows at 6% for three years. The future value of the $5,000 is $5,000 * (1 + 0.06)^3 = $5,955.08. The remaining amount needed is $10,000 - $5,955.08 = $4,044.92. To find the present value of $4,044.92 at 10% interest over three years, we use the formula: Present Value = Future Value / (1 + r)^n, where r is the interest rate and n is the number of years. So, $4,044.92 / (1 + 0.10)^3 = $3,039.

You Want to Travel to Europe to Visit Relatives When