General Question

Metadata's avatar

How to figure out this compounding interest word problem?

Asked by Metadata (37 points ) August 27th, 2014

Can someone help me with this word problem?
Uncle Al wants to open an account for his nieces and nephews that he hopes will have $100,000 in it after 25 years. How much should he deposit now into an account that yields 1.75% interest compounded monthly so he can be assured of meeting that goal amount?

The answer is $64,585.43, but I don’t understand how they arrived at this answer. I know the formula for Present Value and Future Value, but I don’t get the same answer. Thanks in advance for your help.

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2 Answers

LostInParadise's avatar

I will start you out. Let me know if you need further help.
The interest per month is i = .0175/12. The number of compounding periods = number of months = 12×25 = 300.
p (1+i)^300 = 100000, where p is the starting principal that we want to find.

Metadata's avatar

I figured out the answer. It was just a decimal mistake. Thank you, LostinParadise.

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