Question

Based on the arrangement of Linda’s father, Linda is to get RM115,000 on her 25th birthday which is 5 years away. The funds have already been deposited in a bank and Linda wants to find out the present value of the fund. Linda has also found out that banks are, in general, offering 5% interest rate, Calculate the present value of the fund.

Answer 1

Solution :

The formula for calculating the future value of an Investment with compound Interest is

FV = P * [ ( 1 + ( r / n ) ) n * t ]

Where

FV = Future value of Investment   ; P = Principal Investment today or Present value of the fund   ;  

r = rate of interest   ;   n = No. of compounding periods per year ; t = Time in years ;

As per the information given in the question we have

FV = RM 115,000   ;   r = 5 % = 0.05 ; n = 1 ;   t = 5 Years ; P = To find    ;

Applying the above values in the formula we have

RM 115,000 = P * ( 1 + ( 0.05 / 1 ) ) 1 * 5    

RM 115,000 = P * ( 1 + ( 0.05 / 1 ) ) 5

RM 115,000 = P * ( 1 + 0.05 ) 5

RM 115,000 = P * ( 1.05 ) 5

RM 115,000 = P * 1.276282

P = RM 115,000 / 1.276282

P = RM 90,105.509144

P = RM 90,105.51 ( When rounded off to the nearest dollar )

Thus the present value of the fund = RM 90,105.51

Note : ( 1.05 ) ( 5 ) = 1.276282 is calculated using the excel function =POWER(Number,Power)

=POWER(1.05,5)