you are planning to purchase a new computer in one year and you know it will cost you $1,100. if your bank pays an annual interest rate of 10%, how much money do you need to save this year to be able to afford the purchase?

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26-10-2022
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you are planning to purchase a new computer in one year and you know it will cost you $1,100. if your bank pays an annual interest rate of 10%, how much money do you need to save this year to be able to afford the purchase?

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qwoffwhite qwoffwhite · Answer 1 · 2022-11-01T12:11:27-04:00

$1000 need to save this year to be able to afford the purchase of a new computer.

In order to find the money which is to be saved now for future purchases can be found by calculating the present value. It can be calculated by dividing the future cash flow by one plus the discount rate raised to the number of periods, present value is a notion based on the time value of money that argues that money earned today is worth substantially more than money earned tomorrow.

The formula for finding the present value is,

PV= [tex]\frac{FV}{(1+i)^{n} }[/tex]

Here PV is the present value which is the money to be saved for purchasing the computer which is to be found.

FV is the future value as it is known to be after 1 year. It is given by,

FV= $1,100

i is the annual interest paid by the bank. It is given by,

i= 10%

i=0.1

n is the number of years in which the interest is calculated. It is given by,

n= 1

Now, put the values in the above formula. Therefore,

PV= [tex]\frac{1100}{(1+0.1)^{1} }[/tex]

=[tex]\frac{1100}{0.1}[/tex]

=1000

So, $1000 is to be saved this year for purchasing the new computer.

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