An investment company pays 8​% compounded semiannually. You want to have $12,000 in the future. (A) How much should you deposit now to have that amount 5 years from​ now? (Round to the nearest cent) (B) How much should you deposit now to have that amount 10 years from now​? (Round to the nearest cent)

QUESTION POSTED AT 01/06/2020 - 04:38 PM

Answered by admin AT 01/06/2020 - 04:38 PM

Before we start answering the question, let's define the compound interest formula:
A = P(1+ \frac{r}{n}) ^{nt}
Where:
'A'  is the amount of money in dollars
'P' is the principal amount of money in dollars
'r' is the interest rate (decimal)
'n' is the number of times interest is compounded per year
't' is the time in years

(A) Find Principal Amount
Given:
A = 12,000
P = ?
r = 0.08
n = 2 (semiannually)
t = 5
Now we plug our values in and solve:
12,000 = P(1+ \frac{0.08}{2}) ^{(2)(5)}
12,000 = P(1.04) ^{10}
P = 8106.77
∴ You would have to deposit $8106.77 in order to have $12,000 in 5 years from now.

(B) Find Principal Amount
Same given values as above, with the exception of 't' which is now 10 instead of 5. 
12,000 = P(1+ \frac{0.08}{2}) ^{(2)(10)}
12,000 = P(1.04) ^{20}
P = 5476.64
∴ You would have to deposit $5476.64 in order to have $12,000 in 10 years from now.

Hope this helps!
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