Fin 325- Week 2

Text Questions and Exercises

Week Two Individual Assignment

Linda Lopez

University of Phoenix

Group # PA07BSM01

FIN 325, Financial Analysis for Managers ІІ

Instructor: Said Nikkhah, P.E., MBA

Assignment Due; March 11, 2008,

4. Future Values. You deposit $1,000 in your bank account. If the bank pays 4 percent simple interest, how much will you accumulate in your account after 10 years? What if the bank pays compound interest? How much of your earnings will be interest on interest?

Simple Interest = (principal) (Interest rate) (# of yrs)

($1000 ) (.04 ) (10 ) = 400

On simple interest for 10 years, the individual can accumulate a total of $400.

A total of $1400

Future value of $1000 = ($1000) (1+ r) ¹

Compound Interest = ($1000) (1.04) 10 power = $1, 480.244285

$1400 - $1480.25 = $80.25

Earnings on 10 years interest on interest is extra $ 80.25

5. Present Values. You will require $700 in 5 years. If you earn 5 percent interest on your funds, how much will you need to invest today in order to reach your savings goal?

Appendix B 5% on 5 years

($700) (.784) = 548.8

or

700 ÷ 1.05 to the fifth power = 548. 4683165

Thus I will need to invest $548.80 or $548.47 today to provide $700 in 5 years.

Practice Problem 38, Amortizing Loan. Consider a 4-year amortizing loan. You borrow $1,000 initially, and repay it in four equal annual year-end payments.

(A) If the interest rate is 8 percent, show that the annual payment is $301.92.

(B) Fill in the following table, which shows how much of each payment is interest versus principal repayment (that is, amortization), and the outstanding balance on the loan at each date.

|Time |Loan Balance |Year-End Interest Due on Balance |Year-End Payment |Amortization of Loan |

|1 |$1,000 |$80 |$301.92 |$221.92 |

|2 |$778.05 |$62.25...