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ACT 6692
Module 13 – Assignment (Problems)
Solutions
131—Present value and future value computations
Part (a)
Compute the amount that a $20,000 investment today would accumulate at 10%
(compound interest) by the end of 6 years.
Part (b)
Don wants to retire at the end of this year (2007). His life expectancy is 20 years from
his retirement. Don has come to you, his CPA, to learn how much he should deposit on
December 31, 2007 to be able to withdraw $40,000 at the end of each year for the next
20 years, assuming the amount on deposit will earn 8% interest annually.
Part (c)
Mary Houser has a $1,200 overdue debt for medical books and supplies at Ken's
Bookstore. She has only $400 in her checking account and doesn't want her parents to
know about this debt. Ken's tells her that she may settle the account in one of two ways
since she can't pay it all now:
1.
Pay $400 now and $1,000 when she completes her residency, two years from today.
2.
Pay $1,600 one year after completion of residency, three years from today.
Assuming that the cost of money is the only factor in Mary's decision and that the cost of
money to her is 8%, which alternative should she choose? Your answer must be
supported with calculations.
Solution 131
Part (a) Future value of $20,000 compounded @ 10%
for 6 years
($20,000 × 1.77156) = $35,431
.
Part (b) Present value of a $40,000 ordinary annuity
discounted @ 8% for 20 years
($40,000 × 9.81815) = $392,726
.
Part (c) Alternative 1
Present value of $1,000 discounted @ 8% for 2
years
($1,000 × .85734) = Present value of $1,000 now
=
$
857
Present value of $400 now =
400
Present value of Alternative 1
$1,257
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Present value of $1,600 discounted @ 8% for 3
years ($1,600 × .79383)
$1,270
On the present value basis, Alternative 1 is
preferable.
132—Annuity with change in interest rate
Meg Sloan established a savings account for her son's college education by making annual
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This note was uploaded on 02/22/2011 for the course MBA 6692 taught by Professor Lewis during the Spring '11 term at Troy.
 Spring '11
 LEWIS
 Future Value, Interest

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