Question

Calculating Present Values. Suppose you are still committed to owning a $150 Ferrari. If you believe your mutual fund can achieve a 10.25 percent annual rate of return, and you want to buy the car in 10 years on the day you turn 30, how much must you invest today? 

Answer 1

In order to understand this note that we have a future value of $150,000 that we must get in 10 years, so we have to work backward to find out how much we need to invest now, so every year a 10.25% annual rate would apply to the compunding amount. 

The time period is ten years. 

The initial formula to start this, but remember we are solving for present value:

FV= PV(1+r)^t

Pv= Fv/ (1+r)^t

PV = $150,000 / (1+.1025)¹⁰

PV = $150,000 / (1.1025)¹⁰

PV = $56,533.42

The present value that the person must invest in today is $56,533.22, in  order to get $150,000 for the Ferrari, this is without considering taxes and other factors.