DR1 Discount Rate Example

Problem

At what annual interest rate must 120,000 be invested so that it will grow to be 250,000 in 9 years?

Solution

The amount of 120,000 (PV) is invested now at the start of period 1, and needs to be compounded forward 9 years (n) to the value of 250,000 (FV).

This problem is solved using the lump sum discount rate formula as follows.

FV = 345,000
PV = 120,000
n = 9

i = (FV / PV)(1 / n) - 1
i = (250,000 / 120,000)(1 / 9) - 1
i = 8.50%

Explanation

The amount of 120,000 invested today in an account earning 8.50% compound interest, will grow into an amount of 345,000 in 9 years time.

DR1 Discount Rate Examples

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