Chapter 4 - Solve for the unknown number of years in each...

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Unformatted text preview: Solve for the unknown number of years in each of the following Present Value Years Interest Rate Future Value $ 900 12% $ 1,755 2,591 10 4,350 34,105 15 393,62 33,800 22 217,86 8 Explanation: To answer this question, we can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. We will use the FV formula, that is: FV = PV(1 + r ) t Solving for t , we get: t = ln(FV / PV) / ln(1 + r ) FV = $1,755 = $900 (1.12) t t = ln($1,755 / $900) / ln 1.12 t = 5.89 years FV = $4,350 = $2,591(1.10) t t = ln($4,350 / $2,591) / ln 1.10 t = 5.44 years FV = $393,620 = $34,105(1.15) t t = ln($393,620 / $34,105) / ln 1.15 t = 17.50 years FV = $217,868 = $33,800(1.22) t t = ln($217,868 / $33,800) / ln 1.22 t = 9.37 years Assume the total cost of a college education will be $410,000 when your child enters college in 15 years. You presently have $68,000 to invest. Required: What annual rate of interest must you earn on your investment to cover the cost of your child’s college education? Annual rate % Explanation: To answer this question, we can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. We will use the FV formula, that is: FV = PV(1 + r ) t Solving for r , we get: r = (FV / PV) 1 / t – 1 r = ($410,000 / $68,000) 1/15 – 1 r = 0.1272 or 12.72% Requirement 1: At 9.00 percent interest, how long does it take to double your money? Length of time years Requirement 2: At 9.00 percent interest, how long does it take to quadruple your money? Length of time years Explanation: To find the length of time for money to double, triple, etc., the present value and future value are irrelevant as long as the future value is twice the present value for doubling, three times as large for tripling, etc. To answer this question, we the future value is twice the present value for doubling, three times as large for tripling, etc....
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This note was uploaded on 10/31/2011 for the course ECFI 305 taught by Professor Johansen,t during the Fall '08 term at Fort Hays.

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Chapter 4 - Solve for the unknown number of years in each...

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