FIN CHAP 06 SOLUTIONS complete

FIN CHAP 06 SOLUTIONS complete - CHAPTER 6 6-1 FUTURE VALUE...

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 6 6-1 FUTURE VALUE If you deposit $10,000 in a bank account that pays 10 percent interest annually, HOW MUCH MONEY WILL BE IN YOUR ACCOUNT AFTER 5 YEARS? 0 10% 1 2 3 4 5 PV = 10,000 FV 5 = ? FV n = PV (1 + i) n FV 5 = $10,000(1.10) 5 = $10,000(1.61051) = $16,105.10 ALTERNATIVELY, WITH A FINANCIAL CALCULATOR ENTER THE FOLLOWING: N = 5 I = 10 PV = -10,000 Now, solve for FV FV = $16,105.10.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
6-2 PRESENT VALUE Assume that you can earn 7 percent if you were to invest in other securities of equal risk. WHAT IS THE PRESENT VALUE OF A SECURITY THAT PROMISES TO PAY YOU $5,000 IN 20 YEARS? 0 7% 1 2 3 ……. . 20 PV = ? FV 20 = 5,000 PV = ( 29 n n i FV + 1 PV = ( 29 20 07 . 1 5000 PV = $1,292.095 or $1,292.10 WITH A FINANCIAL CALCULATOR ENTER THE FOLLOWING: N = 20 I = 7 FV = 5,000. Now, solve for PV PV = $1,292.10
Background image of page 2
6-3 TIME FOR A LUMP SUM TO DOUBLE If you deposit money today into an account that pays 6.5 percent interest, HOW LONG WILL IT TAKE FOR YOU TO DOUBLE YOUR MONEY? 0 6.5% 1 2 3 ……. n = ? PV = 1 FV n = 2 FV n = PV (1 + i) n 2 = 1(1.065) n 2 = 1.065 n Note: this problem can be solved (which I am not requiring you to do) by taking the natural log of both sides of the equation: ln 2 = n ln 1.065 n = __ln 2___ ln 1.065 n = .6931 .0630 n = 11.006 WITH A FINANCIAL CALCULATOR ENTER THE FOLLOWING: I = 6.5 PV = -1 PMT = 0 FV = 2 Now, solve for N N = 11.01 11 years (note: because of internal programming some calculators will round up to 12)
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
6-4 REACHING A FINANCIAL GOAL John Roberts has $42,180.53 in a brokerage account, and he plans to contribute an additional $5,000 to the account at the end of every year. The brokerage account has an expected annual return of 12 percent. IF JOHN’S GOAL IS TO ACCUMULATE $250,000 IN THE ACCOUNT, HOW MANY YEARS WILL IT TAKE FOR JOHN TO REACH HIS GOAL? 0 12% 1 2 3 ……. . n = ? PV = 42,180.53 5000 5000 5000 FV = 250,000 FV = PV (1 + i ) n + PMT = - + n t t n i 1 ) 1 ( $250,000 = $42,180.53 (1 + i ) n + 5,000 = - + n t t n i 1 ) 1 ( $250,000 = $42,180.53 (1.12 ) n + 5,000 = n t 1 ( 29 t n - 12 . 1 USING YOUR FINANCIAL CALCULATOR, ENTER THE FOLLOWING DATA: I = 12 PV = -42,180.53 (outflow) PMT = -5,000 (outflow) FV = 250,000 N = ? Solve for N……. . N = 11 Therefore, it will take 11 years for John to accumulate $250,000. Note: to check your answer mathematically, you can plug n = 11 into the data above and solve for FV, e.g., FV = $42,180.53 (1.12 ) 11 + 5,000 = n t 1 ( 29 t n - 12 . 1 FV = $146,727.082 + $103,272.92 = $250,000
Background image of page 4
6-5 EFFECTIVE RATE OF INTEREST Your parents are planning to retire in 18 years. They currently have $250,000, and they would like to have $1,000,000 when they retire. WHAT ANNUAL RATE OF INTEREST WOULD THEY HAVE TO EARN ON THEIR $250,000 IN ORDER TO REACH THEIR GOAL, ASSUMING THEY SAVE NO MORE MONEY? 0
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/15/2008 for the course FIN 321 taught by Professor Kelley during the Spring '08 term at Loyola Maryland.

Page1 / 41

FIN CHAP 06 SOLUTIONS complete - CHAPTER 6 6-1 FUTURE VALUE...

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online