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Math Help - Future and Present Value

  1. #1
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    Mar 2010
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    Future and Present Value

    Ok. I'm just looking for some help understand how a problem is done. I'm not looking for answers. It is an example problem, but I don't understand how they arrived at the answer.

    "An investor wants to have $20,000 in 9 months. If the best available interest rate is 6.05% per year, how much must be invested now to yield the desired amount?"

    They present the following solution:

    "We know that S = P + I = P + Prt. In this case, we must solve for P, the present value. Also, the time 9 months is 9/12 of a year.

    $20,000 = P + P(0.0605)(9/12) = P + 0.045375P

    $20,000 = 1.045375P

    $20,000
    1.045375 = P so P = $19,131.89

    Ok. I'm going to sound like sort of an idiot, but I understand where they got all of the information in line 1. I -do not- understand how they got from line 1 to line 2. Where did all of the P's go and how did they magically add 1 to 0.045375P ??

    Line 2 to line 3 i get, because they divided both sides by 1.045375 to isolate P.

    Any help you can offer would be much appreciated.
    Last edited by EverMindful; March 1st 2010 at 10:43 AM. Reason: It isn't displaying the math problem correctly.
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  2. #2
    Member
    Joined
    Mar 2009
    Posts
    133
    ummm.. They are just collecting like terms;
    P+P=(1+1)P=2P
    P+0.5P=(1+0.5)P=1.5P

    Note that line 1 is;
    P + P(0.0605)(9/12), or equivalently P[1+(0.0605)(9/12)]
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