Question: Think of something you want or need for which you currently do not have the funds. It could be a vehicle, boat, horse, jewelry, property, vacation, college fund, retirement money, etc. Select something which costs somewhere between $2,000 and $50,000. Use the “Present Value Formula”, which computes how much money you need to start with now to achieve the desired monetary goal. Assume you will find an investment that promises somewhere between 5% and 10% interest on your money (you choose the rate) and pretend you want to purchase your desired item in 12 years. (Remember that the higher the return, usually the riskier the investment, so think carefully before deciding on the interest rate.) How much do you need to invest today to reach that desired amount 12 years from now? Edit
Answer: Present value is used for calculating the value of a particular sum of money which is going to be received at a future date after investing the amount.
In the given solution, I want to purchase a horse of value $40,000 and the interest rate provided is 9% on the investment. So the amount needs to be invested for getting a sum of $40,000 after 12 years will be calculated as follows:
Present Value = Future Value / (1+ rate of interest)no. of years
Present Value = 40,000 / (1+0.09)12
Present Value =14,221.39
So, I need to invest $14,221.39 in present for purchasing the horse of value $40,000 after 12 years. The rate of interest is taken at 9% because for more return there will be higher risk, so risk factor is not considered higher for getting the return.
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