HADM2222, Prof. Q. Ma, Fall 2009
1
1. [Future Value] Five friends all open investment accounts today. Which one will withdraw the
largest amount of money from their account assuming that they each withdraw their funds at the
end of their initial investment period?
±
Anthony invests $1,000 for eight years at 6% simple interest.
±
Bryan invests $1,000 for four years at 9% with interest compounded annually.
±
Crystal invests $800 for ten years at 11% with interest compounded annually.
±
Daniel invests $1,200 for six years at 8% simple interest.
±
Elizabeth invests $900 for nine years at 9% with interest compounded annually.
Solution:
A: 1,000*(1+.06*8)
= 1,480
B: 1,000*(1+.09)
4
= 1,411.58
C: 800*(1+.11)
10
= 2,271.54
D: 1,200*(1+6*.08)
= 1,776
E: 900*(1+.09)
9
= 1,954.70
2. [FV as Growth Formula] The net sales for Wal-Mart of year 2007 were about $350 billions.
Suppose the net sales grow by 3% for the next 4 years. What will be the net sales for year 2011?
Solution
: FV formula used for growth. Here we have T=4, r=3% and PV=350.
FV is 350*(1+.03)
4
= $393.93.
3. [Present Value] To settle a lawsuit, Bill decided to pay Monica $3,000 in ten years. If the
discount rate for Monica is 10%, how much is the settlement worth to her?
Solution
: We have FV=3,000; r=10% and T=10; we need PV.
PV= 3,000/(1+.10)
10
= 1,156.63.
4. [What’s Present?] Your parents set up a trust fund for you 10 years ago that is now worth
$19,671.51. If the fund earned 7% per year, how much did your parents invest?
Solution
: We have FV=19,671.51; r=7%; T=10; we need PV.
PV = 19,671.51/(1+.07)
10
= 10,000