Calculating Present Investment Needed
Having learnt how to calculate a future value through the compound interest formula we also need to be able to calculate the present value that needs to be invested now to reach a target future value, given a set interest rate.
The formula for calculating present value is:
An example:
What amount would need to be invested now in order to accumulate £10,000 over five years with an annual interest rate of 6%?
To answer the question we need to input the relevant figures into the compound interest formula.
FV = £10,000
r = 0.06
n = 5
Inputting these figures into the formula shows that the amount needing to be invested today would be £7,472.58.
Questions - Use Your Note Taker To Jot Down Ideas / Calculations
1. What amount would need to be invested now in order to accumulate £12, 000 over 4 years with an interest rate of 4%?
- a) £10,345.45
- b) £11,234.78
- c) £10,259.88
- d) £10,257.65
D)
Use the present value formula.
PV = £12,000 / (1 + 0.04) ^ 4
2. What amount would need to be invested now in order to accumulate £32,000 over 7 years with an annual interest rate of 5%?
a) £23,365.48
b) £22,741.80
c) £28,256.77
d) £24,787.65
B)
Use the present value formula.
PV = £32,000 / (1 + 0.05) ^ 7
- Further Study Text: Page 160