Answer to Question #123428 in Microeconomics for Natalia Faustin

Question

You just inherited $10,000. while you plan to squander some of it away, how much should you deposit in an account earning 5% interest per year if you’d like to have $10,000 in the account in 10 years?

Answer 1

Assuming annual compounding, the expression that describes the future value (F) of an investment (P) at an interest rate r for a period of n years is;

$F=P(1+r)$ⁿ

If the desired value after 10 years at 5% per year is $10,000, the required investment is given by;

$10000=P(1+0.05)$¹⁰

$P=\frac{10,000}{1.6289}$

You should deposit $6139.11 in to the account