To calculate the present value of the future cost of R 6,000 in 4 years' time, we can use the formula for compound interest:
Present Value = Future Value / (1 + r)^n
Where:
- Present Value is the amount we need to deposit today
- Future Value is R 6,000
- r is the interest rate per period (13% per annum, compounded monthly)
- n is the number of periods (4 years)
First we need to convert the annual interest rate to a monthly interest rate:
Monthly interest rate = Annual interest rate / 12
= 13% / 12
= 1.0833% per month
Now we can substitute the values into the formula and calculate the present value:
Present Value = R 6,000 / (1 + 0.010833)^48
Present Value = R 6,000 / (1.010833)^48
Present Value = R 6,000 / 1.727929
Present Value = R 3,471.56
Therefore, the trust committee should deposit R 3,471.56 today into an account that pays 13% interest per annum, compounded monthly, in order to cover the expected cost of the project in 4 years’ time.
A trust committee estimates that it will need an amount of R 6 000 in four years’ time to cover the expected cost of a new project. How much should they deposit today into an account that pays 13% interest per annum, compounded monthly in order to cover the expected cost of the project in 4 years’ time?
1 answer