SOLUTION: please help me solve this word equation: You want to buy a car in 5 years, and estimate that you need about 20,000. If the bank pays you 6% interest rate, how much do you need to
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Question 214926: please help me solve this word equation: You want to buy a car in 5 years, and estimate that you need about 20,000. If the bank pays you 6% interest rate, how much do you need to put in the bank today?
Answer by Theo(13342) (Show Source): You can put this solution on YOUR website!
The general formula is:
PV(FA) = FA/(1+i)^n
PV = present value
FA = future amount
i = interest rate per time period
n = number of time periods
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Assuming interest rate is compounded monthly, your time periods becomes months.
You would need to divide your interest rate per year by 12 to get interest rate per month.
You would need to multiply your number of years by 12 to get number of months.
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FA is the future amount = $20,000
i = interest rate per time period = interest rate per month = .06/12 = .005
n is number of time periods = number of months = 5*12 = 60
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PV(FA) = FA/(1+i)^n becomes:
PV(FA) = 20000/(1.005)^60 = 14827.44392 = $14,827.44
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If you were compounding your interest rate yearly, then i would be .06 and n would be 5.
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