Question

You want to make a one-time deposit into a bank account today and have $10,000 in the account in five years.

Which interest rate requires you to deposit the most amount of money into the account today?

Please show work.

a.) 1%

b.) 4%

c.) 3%

d.) 2%

Answer 1

Present value=Cash flow*Present value of discounting factor(rate%,time period)

a.Present value=10,000/1.01^5

=10,000*0.951465688

=$9514.66(Approx)

b.Present value=10,000/1.04^5

=10,000*0.821927107

=$8219.27(Approx)

c.Present value=10,000/1.03^5

=10,000*0.862608784

=$8626.09(Approx)

d.Present value=10,000/1.02^5

=10,000*0.90573081

=$9057.31(Approx)

Hence 1% interest rate requires you to deposit the most amount of money into the account today