Question

Your grandmother invested one lump sum 20 years ago at 4 percent interest. Today, she gave you the proceeds of that investment which totaled $6,539.87. How much did your grandmother originally invest? a. $2,750.00 b. $2,984.71 c. $2,531.36 d. $3,785.00

Answer 1

Given the following data,

Future Value = $6539.87

Annual interest rate = 4%

number of years = t = 20

Present Value = ?

We know that Present value of the lump sum formula is given by,

PV = FV/ (1+r)^t

where

PV = Present value

FV = Future value

r = annual interest rate

t = number of periods

Substituting the above given values, we get

PV = 6539.87/(1+4%)^20

PV = 6539.87/(1+0.04)^20

PV = 6539.87/(1.04)^20

PV = 6539.87/2.1911

PV = 2984.71

Therefore, grandmother originally invested $2984.71.

Answer is b. $2,984.71