In four years, Tom wants to take an expensive vacation. Based on his calculations, the trip will likely cost $12,000. If Tom can earn 8% per annum on an investment, the amount he will need to set aside today to reach his goal is:

$8,820.36

Explanation:

Compounding is the system used to compute the future value of an amount today. It is the means to determine the tomorrow's worth of $1.

The opposite of this is discounting which is the determination of the present value of a future amount i.e the current value of $1 tomorrow.

It is given as

Fv = Pv ( 1 + r )^n

where

Fv = Future value

Pv = Present value

r = rate

n = time in years

12000 = Pv ( 1 + 0.08)^4

Pv = 12000(1.08^-4)

= $8,820.36

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