Basic HTML Version
Q
uantitative
R
easoning &
P
roblem
S
olving
366
© 2014 Pacific Crest
M
ethodology
C
alculating
P
resent
V
alue
for a
F
uture
A
mount
Scenario:
You need $2000 for a down payment on a car that you plan to buy in 5 years. You
can invest money now at 6% compounded monthly. How much should you invest?
Step
Explanation
1. Identify values for
FV
,
r
,
n
, and
t
Identify the future value
FV
you want to have, the rate
r
, the time
t
in years
for the investment to grow, and the number
n
of compounding periods per
year.
WATCH
IT WORK!
FV
= 2000
r
= .06
t
= 5
n
= 12
2.
Calculate
PV
,
the present value
needed to have a
future value
FV
1
nt
FV
PV
r
n
=
+
12(5)
2000
$1482.74
.06 1
12
PV
=
=
+
So if you invest $1500 now, you will have more than $2000 in 5 years.
3.
Validate
Use the Excel Present Value (PV) function to validate your calculations
=PV(r,n,pmt, FV)
06 (.
, 60, 0, 2000)
12
PV
=
−
which gives the same present value of $1482.74.
YOUR
TURN!
Scenario:
You hope to purchase your first house after you finish school in 4 years. You
think that a down payment of $10,000 will do, and you can invest money now
at 8% compounded daily. How much should you invest?