Orlando must be able to take $5,000 from his savings in four years and again in seven years. His savings will earn 7.2% compounded monthly. How much must be in the account now in order to meet his needs?
A) $6,738
B) $6,050
C) $6,777
D) $7,255
E) $7,451

Question

Quizplus · Accepted Answer

To find the present value needed, calculate the present value of each $5,000 withdrawal separately using the formula for present value of a future sum: PV = FV / (1 + r/n)^(nt). For the first withdrawal in 4 years, PV = 5000 / (1 + 0.072/12)^(12*4). For the second withdrawal in 7 years, PV = 5000 / (1 + 0.072/12)^(12*7). Add these two present values to get the total amount needed now. The correct total is approximately $6,777.

Orlando Must Be Able to Take $5,000 from His Savings