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Unformatted text preview: BAC1644 TUTORIAL Ch 4 1. The simple interest per year is: $8,000 0.07 = $560 So, after 10 years, you will have: $560 10 = $5,600 in interest. The total balance will be $8,000 + 5,600 = $13,600 With compound interest, we use the future value formula: FV = PV(1 + r ) t FV = $8,000(1.08) 10 = $17,271.40 The difference is: $17,271.40 13,600 = $3,671.40 2. To find the FV of a lump sum, we use: FV = PV(1 + r ) t FV = $3,150(1.18) 7 = $ 10,034.24 FV = $8,453(1.06) 19 = $ 25,575.39 FV = $89,305(1.12) 13 = $389,681.75 FV = $227,382(1.05) 29 = $935,935.14 3. To find the PV of a lump sum, we use: PV = FV / (1 + r ) t PV = $17,328 / (1.04) 12 = $ 10,823.02 PV = $41,517 / (1.09) 4 = $ 29.411.69 PV = $790,382 / (1.12) 16 = $128,928.43 PV = $647,816 / (1.10) 21 = $ 87,539.75 4. 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 FV = $1,381 = $715(1 + r ) 6 r = ($1,381 / $715) 1/6 1 r = 0.1160 or 11.60% FV = $1,718 = $905(1 + r ) 7 BAC1644 TUTORIAL Ch 4 r = ($1,718 / $905) 1/7 1 r = 0.0959 or 9.59% = 0....
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This note was uploaded on 01/14/2012 for the course ACCOUNT 102 taught by Professor Adams during the Spring '11 term at Bradford School of Business.
 Spring '11
 Adams

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