Pinnacle Homes, a real estate development company, is planning to build five homes, each costing $125,000, in 2 years. The Galaxy Bank pays 6% interest compounded semiannually. How much should the company invest now to have sufficient funds to build the homes in the future?

Answer 1

P = Po(1+r)^n = $125,000

r = (6%/2)/100% = 0.03 = Semi-annual %
rate.

n = 2yrs. + 2comp./yr. = 4 Compounding
periods.

Po(1.03)^4 = 125,000
Po = 125000/(1.03^4) = $111,060.88

Answer 2

Correction:

n = 2yrs. * 2comp/yr. = 4 Compounding
periods.