FIN 300 ch 5

Ten years ago, Jackson Supply set aside $130,000 in case of a financial emergency. Today, that account has increased in value to $330,592. What rate of interest is the firm earning on this money?

$330,592 = $130,000 ×(1 + r)10; r = 9.78 percent *plug and chug from answers

Towne Station is saving money to build a new loading platform. Three years ago, they set aside $23,000 for this purpose. Today, that account is worth $31,406. What rate of interest is Towne Station earning on this investment?

$31,406 = $23,000 ×(1 + r)3; r = 10.94 percent *plug and chug from answers

Kurt won a lottery and will receive $1,000 a year for the next 50 years. The value of his winnings today discounted at his discount rate is called which one of the following? Simple amount. Present value. Compounded value. Single amount. Future value.

Present value.

You have just made a $1,500 contribution to your individual retirement account. Assume you earn a rate of return of 8.7 percent and make no additional contributions. How much more will your account be worth when you retire in 25 years than it would be if you waited another 5 years before making this contribution?

$4,117.64 FV = $1,500 ×(1 + .087)25 = $12,073.41 FV = $1,500 ×(1 + .087)20 = $7,955.77 Difference = $12,073.41 - 7,955.77 = $4,117.64

You just received $25,000 from an insurance settlement and have decided to invest it for your retirement. Currently, your goal is to retire 40 years from today. How much more will you have in your account on the day you retire if you can earn an average return of 8.2 percent rather than just 8 percent?

$41,718.03 Future value = $25,000 ×(1 + .082)40 = $584,831.07 Future value = $25,000 ×(1 + .08)40 = $543,113.04 Difference = $584,831.07 - 543,113.04 = $41,718.03

Sixty years ago, your mother invested $4,500. Today, that investment is worth $430,065.11. What is the average annual rate of return she earned on this investment?

$430,065.11 = $4,500 ×(1 + r)60; r = 7.90 percent *plug and chug from answers

You're trying to save to buy a new $72,000 sports car You have $38,000 today that can be invested at your bank. The bank pays 1.26 percent annual interest on its accounts. How many years will it be before you have enough to buy the car assuming the price of the car remains constant?

$72,000 = $38,000 ×(1 + .0126)t; t = 51.04 years *plug and chug from answers

Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Barb also deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Andy will withdraw his interest earnings and spend it as soon as possible. Barb will reinvest her interest earnings into her account. Given this, which one of the following statements is true? A. Barb will earn more interest the second year than Andy. B. After five years, Andy and Barb will both have earned the same amount of interest. C. Barb will earn more interest the first year than Andy will. D. Andy will earn more interest in year three than Barb will. E. Andy will earn compound interest.

A. Barb will earn more interest the second year than Andy.

Terry is calculating the present value of a bonus he will receive next year. The process he is using is called: A. Discounting. B. Accumulating. C. Compounding. D. Reducing. E. Growth analysis.

A. Discounting.

Kurt won a lottery and will receive $1,000 a year for the next 50 years. The value of his winnings today discounted at his discount rate is called which one of the following? A. Present value. B. Future value. C. Single amount. D. Compounded value. E. Simple amount.

A. Present value.

Which of these will increase the present value of an amount to be received sometime in the future? A. Decrease in the future value. B. Decrease in the interest rate. C. Decrease in both the future value and the number of time periods. D. Increase in the discount rate. E. Increase in the time until the amount is received.

B. Decrease in the interest rate.

Phillippe invested $1,000 ten years ago and expected to have $1,800 today. He has not added or withdrawn any money from this account since his initial investment. All interest was reinvested in the account. As it turns out, he only has $1,680 in his account today. Which one of the following must be true? A. He ignored the Rule of 72 which caused his account to decrease in value. B. The future value interest factor turned out to be higher than he expected. C. He earned a lower interest rate than he expected. C. He earned simple interest rather than compound interest. D.He did not earn any interest on interest as he expected.

C. He earned a lower interest rate than he expected.

Christina invested $3,000 five years ago and earns 2 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following? Compounding. Discounting. Simplifying. Aggregation. Accumulation.

Compounding.

You would like to give your daughter $75,000 towards her college education 17 years from now. How much money must you set aside today for this purpose if you can earn 8 percent on your investments?

$20,270.17 Present value = $75,000/(1 + .08)17 = $20,270.17

You are depositing $3,000 in a retirement account today and expect to earn an average return of 7.5 percent on this money. How much additional income will you earn if you leave the money invested for 45 years instead of just 40 years?

$23,581.80 Future value = $3,000 × (1 + .075)45 = $77,714.52 Future value = $3,000 × (1 + .075)40 = $54,132.72 Difference = $77,714.52 - 54,132.72 = $23,581.80

This morning, DJ's invested $238,000 to help fund a company expansion project planned for three years from now. How much additional money will the firm have three years from now if it can earn 4 percent rather than 3.5 percent on its savings?

$3,842.78 Future value = $238,000 ×(1 + .04)3 = $267,717.63 Future value = $238,000 ×(1 + .035)3 = $263,874.85 Difference = $267,717.63 - 263,874.85 = $3,842.78

You have just made a $1,500 contribution to your individual retirement account. Assume you earn a rate of return of 8.7 percent and make no additional contributions. How much more will your account be worth when you retire in 25 years than it would be if you waited another 5 years before making this contribution?

FV = $1,500 ×(1 + .087)25 = $12,073.41 FV = $1,500 ×(1 + .087)20 = $7,955.77 Difference = $12,073.41 - 7,955.77 = $4,117.64

You just received a $5,000 gift from your grandmother. You have decided to save this money so that you can gift it to your grandchildren 50 years from now. How much additional money will you have to gift to your grandchildren if you can earn an average of 7.5 percent instead of just 7 percent on your savings?

Future value = $5,000 ×(1 + .075)50 = $185,948.73 Future value = $5,000 ×(1 + .07)50 = $147,285.13 Difference = $185,948.73 - 147,285.13 = $38,663.60