BA Chapter 4 Practice Problems

If the interest rate is 10% per year and there are 10 years, what is the present value discount factor?

present value factor = 1/(1+r)^10 1/(1.10)^10 = .3855

For time period and interest rate, the present value factor is _____ the future value factor.

the reciprocal or divided by

A certificate will pay you 100 in 25 years. If the rate of the certificate is 10 percent per year, how much are they really trying to give you today?

FV = 100 N = 25 I/Y = 10 CPT PV = -9.23

Suppose you need 800 to buy textbooks next year. You can earn 7 percent on your money. How much do you have to put up today?

FV = 800 I/Y = 7 N = 1 CPT PV = 747.66

Youv'e located an investment that pays 12% and you invest $400. How much will you have in 3 years? 7 years? How much interest will you have earned? How much of that interest results from compounding?

3 years: $561.97 7 years: 884.27 Interest earned in 7 years: 484.27 Simple Interest: 7 x (400x.12) = 336 Interest from Compounding: 484.27 - 336= 148.27

You have 50,000 but the cate you want costs 68,500. If you can earn 9%, how much do you have to invest today to buy the car in two years?

N = 2 FV = 68500 I/Y = 9 CPT PV = 57,655

Suppose you locate a two year investment that pays 14% per year. if you invest $325, how much will you have at the end of the two years? How much of this is simple interest? how much is compound interest?

N = 2 I/Y = 14 PV = -325 CPT FV = 422.3 Compounded Interest: 422.5 - 325 = 97. 37 Simple Interest = 2 x (325x.14) = 91

Roughly 390 years have passed since the transaction. At 10 percent, $24 will grow by quite a bit over that time. How much?

N = 390 I/Y = 10 PV = 24 CPT FV = roughly 334 quadrillion

You have been offered an investment that promises to double your money every 10 years. What is the approximate rate of return on investment? (Rule 72)

PV = -100 FV = 200 *note the FV is doubled N = 10 CPT I/Y = 7.1773

You invest $500 at 10 percent interest per annum. At the end of 2 years with simple interest you will have _______ and with compound interest you will have _______.

PV = -500 (ouflow) N = 2 I/Y = 10 CPT FV = 605 Compound Interest = 605- 105 Simple Interest = 2 x (500x0.10) Simple Interset FV = 100 + 500 =600

You estimate that will need about $80,000 to send your child to college in 8 years. You have about $35,000 now. If you can earn 20% per year, will make it? At what rate ill you reach your goal?

PV = 35,000 N = 8 I/Y = 20 FV = 150,493.59 Rate needed: .108863 or 10.89%