Chapter 4- Financial Management
Roger just deposited $13,000 into his account @ Market Place Bank. The bank will pay 2.3% interest, compounded annually on this account. How much interest will he earn over the next 15 years?
FV= PV (1+r)^n FV= 13,000 (1+2.3%)^15 PV= 13,000 (1+.023)^15 PV= 13,000 (1.406483) =18,284.28 Interest when compounded annually= 18,284.28-13,000= $5,284.28 When interest is calculated as simple interest= 13,000x 2.3% x 15%= 4,485 5,284.28- 4,485= $799.28
What is the future value of $4,900 invested for 8 years at 7 percent compounded annually?
FV= PV(1+r)^n
The amount an investment is worth after one or more periods of time is the
Future Value
The current value of future cash flows discounted at the appropriate discount rate is called the
Future Value
Ben invested $5,000 twenty years ago with an insurance company that has paid him 5 percent simple interest on his funds. Charles invested $5,000 twenty years ago in a fund that has paid him 5 percent interest, compounded annually. How much more interest has Charles earned than Ben over the past 20 years?
Interest on amount deposited with simple interest by Ben= 5000 x 5% x 20= $5000 Interest on amount deposited with interest compounded annually by Charles= =5000 (1.05)^20 - 5000 = 8266.50 -5,000= 3,266.50
You are choosing between investment offered by two different banks. One promises a return of 10% for three years using simple interest while the other offered a return of 10% for three years using compound interest. You should:
Choose the compound interest option because it provides a higher return
Interest earned on both the initial principal and the interest reinvested from prior periods is called
Compound Interest
The interest rate used to calculate the present value of future cash flows is called the
Discount
The process of finding the present value of some future amount is often called
Discounting
Fresh out of college, you are negotiating with your prospective new employer. They offer you a signing bonus of $1,000,000 today or a lump sum payment of $1,250,000 three years from now. If you can earn 7% on your invested funds, which of the following is true?
Take the lump sum because it has the lower future value.
