Use the present value formula to compute the amount that should be set aside today
to ensure a future value of $ 2,000 in 1 year if the interest rate is 12% annually, compounded annually.
(a) $ 1,776.97 (b) $ 1,765.89 (c) $ 1,785.72 (d) $ 1,786.97 (e) $ 1,768.97
To compute the amount that should be set aside today to ensure a future value of $2,000 in 1 year, we can use the present value formula:
Present Value = Future Value / (1 + Interest Rate)^N
Here, the Future Value is $2,000, the Interest Rate is 12% annually, and N is the number of compounding periods, which is 1 year in this case.
Plugging in the values:
Present Value = $2,000 / (1 + 0.12)^1
Present Value = $2,000 / 1.12
Calculating this, we find that:
Present Value ≈ $1785.72
Therefore, the amount that should be set aside today is approximately $1,785.72 (option c).