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Chapter 9

Problems

1. You invest $3,000 a year for three years at 12 percent.

a. What is the value of your investment after one year? Multiply $3,000 × 1.12.

b. What is the value of your investment after two years? Multiply your answer to part a by 1.12.

c. What is the value of your investment after three years? Multiply your answer to part b by 1.12. This gives your final answer.

d. Confirm that your final answer is correct by going to Appendix A (future value of $1), and looking up the future value for n = 3, and i = 12 percent. Multiply this tabular value by $3,000 and compare your answer to the answer in part c. There may be a slight difference due to rounding.

9-1. Solution:

a. $3,000 × 1.12 = $3,360.00

b. $3,360 × 1.12 = $3,763.20

c. $3,763.20 × 1.12 = $4,214.78

d. $3,000 × 1.405 = $4,215.00 (Appendix A)

2. What is the present value of:

a. $9,000 in 7 years at 8 percent?

b. $20,000 in 5 years at 10 percent?

c. $10,000 in 25 years at 6 percent?

d. $1,000 in 50 years at 16 percent?

Solution:

Appendix B

PV = FV × PVIF

a. $ 9,000 × .583 = $5,247

b. $20,000 × .621 = $12,420

c. $10,000 × .233 = $2,330

d. $ 1,000 × .001 = $1

3. You will receive $5,000 three years from now. The discount rate is 8 percent.

a. What is the value of your investment two years from now? Multiply $5,000 × .926 (one year’s discount rate at 8 percent).

b. What is the value of your investment one year from now? Multiply your answer to part a by .926 (one year’s discount rate at 8 percent).

c. What is the value of your investment today? Multiply your answer to part b by .926 (one year’s discount rate at 8 percent).

d. Confirm that your answer to part c is correct by going to Appendix B (present value of $1) for n = 3 and i = 8%. Multiply this tabular value by $5,000 and compare your answer to part c. There may be a slight difference due to rounding.

9-3. Solution:...