Answered Essay: I am having trouble seeing how the following result was determined:

I am having trouble seeing how the following result was determined:

Tom Simpson wishes to purchase a new combine. The cost is $180,000. How much money must be put in a savings account that compounds at 6% to have $180,000 in 5 years? (Round to the nearest dollar).

Answer: $134,514

When I attempt to calculate the problem I am receiving the following result:

PV= FV/(1+i)n

PV=180000/(1+0.06)5

PV=180000/1.065

PV=180000/1.3382255776

PV= 134506.47

A Present Value Interest Factor Table was also included with Period 5 showing a 6% interest rate at .7473

I am not sure how the determination was made.

Please advise,

Thank you,

Expert Answer

 

We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.

or

Present value=Future value/(1+interest rate)^n

=$180,000/1.06^5

=$180,000*0.7473(Approx)

=$134,514(Approx)[the factor has been rounded off to 4 decimal places and hence it comes to this figure.This figure arrived at ie 134506.47 is by not rounding intermediate calculations].

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