Tom plans to go to college in 5 yrs but is in need of car right now. He plans to invest into a 4% annum compound interest w periods of monthly compound. His school will cost him $8000$ dollars and he has $6000$ dollars right now. How much can he spend on the car?
I have a question here. Not quite sure how I would approach this, I feel like I need to find what $8000$ and $6000$ are worth in 5 years then do it? It doesn't give us his annual income or anything.
Any help?
You need to find out the present value of $8000$ dollars under the given circumstances. Using the formula $$PV=A\left(1+\frac{r}{n}\right)^{-nt},$$ we have $$PV=8000\left(1+\frac{0.04}{12}\right)^{-12\cdot5}\approx6552.02.$$
Sorry, Tom cannot afford a car right now as he needs $\$6552.02$ to grow into $\$8000$ in five years.