Imagine that you need $6,000 in one year to purchase a replacement car. The compound interest rate offered to you is 4%. Complete the following:

• How much cash would you need to set aside today to enable you to pay for the car in one year? You should do this by calculating the present value of $6,000 in one year with a discount rate of 4%.
• Using your answer for the present value, use the future value formula to confirm the amount you invest will be sufficient to purchase the car. Write down your calculations.
• Imagine you decide to delay the purchase of a replacement car for five years but you still think $6,000 will be sufficient to pay for the car in five years time. Work out how much cash you need to set aside today to pay for the car in five years. You should do this by calculating the present value of $6,000 in five years with a discount rate of 4%.
• As you did before, use the future value formula to confirm your answer. Write down your calculations.
• If the discount rate is higher than 4%, how would your answers change?