Myfriends and I were having a chat about future investmentopportunities, and then suddenly we come up with this idea of buyinga piece of land by the lake. The idea was to add value on the landby landscaping and rent it out for events such as wedding. We did ourresearch and found out that there was a piece of land by the lakegoing for $40,000. We also found out that the company selling theproperty had an investment opportunity which promises to have anaverage return of about 9% per year if one invests long term. For usto know how much we needed to invest for the 12 years to reach ourgoal we used Present Value Formula to calculate our present valueinvestment.
Thedesired item is piece of land by the lake
Thecost in 12 years will be about $ 40,000
Theaverage interest rate of the investment is 6%
Usingthe Present Value (PV) formula:
Thiscan also be represented as
PVis the present value that amount to final value FV,iisinterest rate compounded quarterly and nyearsfor total payment.
Accordingto the Present Value formula the quantity raised to a power to hasthe negative exponent (–n). As per the rules of exponents, thismeans that once the negative is put into effect, the base quantitywill change position by dropping down into the denominator where itwill be raised to the power of n. Then it will divide FV instead ofmultiplying FV as it seems to be doing now.
n=12, and i= 6% (0.06) .
CalculationUsing the PV Formula
Onthis step, relevant values are plugged into the formula
Theparenthesis in the bracket are added
Thenegative exponent creates the reciprocal of the base number.
The exponent is applied to the base also known as the PV factor.
Thisis the value of PV
Giventhis PV results and having in mind that the interest rate will notstay exactly at 6% due to inflation we will begin our investment with$ 20,000.
RequiredText: Dugopolski, M. (2012). Elementary and intermediate algebra (4thed.). New York, NY: McGraw-Hill Publishing.