Use the compound interest formula to find the present value

Use the compound interest formula to find the present value P, for the following given values: A = $11, 200, i = 0.067, n = 120

Solution

The compound interest formula is A = P(1+i/n)^nt , where P is the present value, A is the future value, A is the rate of interest and n is the number of times the interest is compounded in an year. There seems to be an error here. Possibly n = 12 ( i.e. interest is compounded monthly)and t = 10.

Then, we have 11200 = P( 1+0.067/12)¹²⁰ or, 11200 = P( 12.067/12)¹²⁰ or, 11200= P(1.950599022). Therefore, P = 11200/(1.950599022) = $ 5741.83 ( on rounding off to the nearest cent).

Note:

The question cannot be solved unless the information regarding the periodicity of compounding is known. We have assumed monthly compounding for 10 years which appears to be most probable. However, if it is 120 years with annual compounding, the result will change.