Week 4: Student Discussion and Response

Stephen Houck

MondayJun 26 at 10:22am

Manage Discussion Entry

For my example this week, I would like to plan for an 11 night Viking River Cruise from Bucharest to Budapest for 2, perhaps as an anniversary trip. The total cost for two is listed as $6,298.00. The investment opportunity I have chosen has a modest return of 5% annually. Per the instructions for this post, I will save for the next 12 years, compounding my interest annually.

To find the amount I need to invest today to reach my goal, I will use the Present Value Formula, P=A(1+r)-n, where:

P=present value

A=amount in dollars

r=annual interest rate

n=number of years(periods)

P=A(1+r)-n Present Value Formula

P=6298(1+.05)-12 Substitute the variables

P=6298(1.05)-12 Perform calculation inside parentheses

P=6298(1/1.0512) Because there is a negative exponent, change to the reciprocal value per the Rules of exponents placing a1.0512 in the denominator position.

P=6298(1/1.79585632602) Raise 1.05 to the power of 12

P=6298(.55683741817) Divide

P=3506.96 Multiply and round to the 100ths place.

Therefore, the amount needed initially to reach my goal is $3506.96.

This formula is similar to its inverse, the future value formula, A=P(1+r)n, where:

A=future amount in dollars

P=present amount

r=annual interest rate

n=number of years(periods)

A=P(1+r)n

A=3506.96(1+.05)12

A=3506.96(1.05)12