You plan to go to Asia to visit friends in three years. The trip is expected to cost a total of $10,000 at that time. Your parents have deposited $5,000 for you in a Certificate of Deposit paying 6% interest annually, maturing three years from now. Uncle Lee has agreed to pay for all remaining expenses. If you are going to put Uncle Lee's gift in an investment earning 10% over the next three years, how much must he deposit today, so you can visit your friends three years from today?

A. $3,039

B. $3,345

C. $5,801

D. $3,757

A) $3,039

Explanation:

Total cost of trip = $10,000

Parent deposited $5,000 at 6% maturing 3 years.

Find the future value of parents deposit.

FV = PV * (1+i) ^n

FV=future value

PV = present value = $5,000

I = interest rate=6%

n = no. of years = 3

FV = PV * (1+i) ^n

= $5,000 * (1+0.06) ^3

=$5,000 * (1.06) ^3

= $5,000*1.191016

=$5,955.08

Balance=$10,000-$5,955.08

=$4,044.92

Uncle Lee agreed to pay for the remaining which is $4,044.92

Calculate uncle Lee's gift of 10% investment for 3 years

FV=PV * (1+i) ^n

PV=FV / (1+i) ^n

PV=$4,044.92 / (1+0.10) ^3

=$4,044.92 / (1.10) ^3

=$4,044.92/1.331

=$3,039.00826

Approximately $3,039