James just received an $8,000 inheritance check from the estate of his deceased rich uncle. James wants to set aside enough money to pay for a trip in five years. If the trip is expected to cost $5,000, how much of the $8,000 must James deposit now if the rate of return is 12% per year in order to have the $5,000 in five years?
A)$2,535
B)$2,835
C)$2,000
D)$5,000

Question

Quizplus · Accepted Answer

To solve this problem, we need to use the formula for future value of a lump sum:

FV = PV x (1 + r)^n

Where FV is the future value, PV is the present value, r is the interest rate per period, and n is the number of periods.

In this case, we want to find the present value that James needs to deposit so that he will have $5,000 in five years at a 12% interest rate per year. So we can plug in the values we know and solve for PV:

$5,000 = PV x (1 + 0.12)^5

$5,000 = PV x 1.762

PV = $5,000 / 1.762

PV = $2,835.10

So James needs to deposit $2,835.10 now in order to have $5,000 in five years at a 12% interest rate per year. The best choice is therefore B.

James Just Received an $8,000 Inheritance Check from the Estate