Answer to Question #26270 in Economics of Enterprise for japhet

Question

answer the following question with regard to the investment theory: John intends to invest a certain sum of money today in order to earn a return of $6000 in 5 years time. how much should john invest today at the interest rate of 7%, compounded annually? would you advise john to proceed with the transaction or not? kindly motivate your position.

Answer 1

According to the formula of compound interest FV =PV*(1 + i)^n, where FV - future value, PV - present value, i - interest rate, n
- number of years.
Inour case, FV = PV + 6000, so we get:
PV+ 6000 = PV*1.07^5
1.4026PV- PV = 6000
0.4026PV= 6000
PV= 6000/0.4026 = $14,904.92
We advice John to proceed with this transaction, as he will gain the significant profit. But if he has another more attractive offer, it'll be better not to proceed with this.