Joe Jan wants to receive $22,000 each year for the next 22 years. Assume a 6% interest rate compounded annually. How much must Joe invest today?
To find out how much Joe must invest today, we can use the concept of present value. Present value is the current worth of a future sum of money, adjusted for the interest rate.
The formula to calculate present value is:
PV = FV / (1 + r)^n
Where:
PV = Present Value
FV = Future Value
r = Interest Rate
n = Number of Years
In this case, Joe wants to receive $22,000 each year for the next 22 years, and the interest rate is 6%. We need to find out the present value, which is the amount Joe needs to invest today to achieve this future cash flow.
Let's calculate the present value using the formula:
PV = $22,000 / (1 + 0.06)^22
PV = $22,000 / (1.06)^22
PV = $22,000 / 2.6899
Using a calculator, we find that the present value is approximately $8,171.64.
Therefore, Joe must invest approximately $8,171.64 today to receive $22,000 each year for the next 22 years with a 6% interest rate compounded annually.