1. The value to invest to meet the $3,000 needed to buy the new stereo for your car at 10% compounded interest for 3 years is $2,253.94.
2. In 12 years, the fund that the grandfather placed $5,000 at an 8% rate of return will be worth $12,590.85.
The future value refers to the value that investment yields at a compounded interest rate in the future.
On the other hand, the present value refers to the amount that is invested to yield a future value at a compounded interest rate.
The future /present values can be computed using an online finance calculator as follows, the future /present value formulas, or the future /present value tables.
1. N (# of periods) = 3 years
I/Y (Interest per year) = 10%
PMT (Periodic Payment) =$0
FV (Future Value) = $3,000
Results:
PV = $2,253.94
Total Interest $746.06
2. N (# of periods) = 12 years
I/Y (Interest per year) = 8%
PV (Present Value) = $5,000
PMT (Periodic Payment) = $0
Results:
FV = $12,590.85
Total Interest = $7,590.85
Thus, the value to invest to meet the $3,000 needed to buy the new stereo for your car at 10% compounded interest for 3 years is $2,253.94 while in 12 years, the fund that the grandfather placed $5,000 at an 8% rate of return will be worth $12,590.85.
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