Question
In: Finance
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?
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?
Solutions
Expert Solution
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.
Heidi Singh answered 2 years agoRelated Solutions
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