FIN257 - CH 5 Slide Examples

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1. Suppose you invest \$1000 for one year at 5% per year. What is the future value in one year?
\$1050
2. Suppose you invest \$1000 for two years at 5% per year. How much will you have two years from now?
\$1102.50
3. What is the future value of \$1000 invested for two years at 5% simple interest? Compound interest? What accounts for the difference?
• \$1100
• \$1102.50
• The extra \$2.50 comes from the interest of .05(\$50) = \$2.50 earned on the first interest payment.
4. Suppose you invest \$1000 for 5 years at 5% per year. How much will you have five years from now?
\$1276.28
5. What is the future value of \$1000 invested for 5 years at 5% simple interest? Compound interest?
• \$1250
• \$1276.28
6. Suppose you had a relative deposit \$10 at 5.5% interest 200 years ago. How much would the investment be worth today?
\$447 189.84
7. What is the future value of \$10 invested for 200 years at 5.5% simple interest? Compound interest? How much would compounding add to the value of the investment?
• \$210.55
• \$447 189.84
8. Suppose your company expects to increase unit sales of widgets by 15% per year for the next 5 years. If you currently sell 3 million widgets in one year, how many widgets do you expect to sell in 5 years?
6 034 072 units
9. Definition of "discounting"
Finding the present value of some future amount.
10. Usual meaning of "value"
Present value unless future value is specifically indicated.
11. Suppose you need \$10,000 in one year for the down payment on a new car. If you can earn 7% annually, how much do you need to invest today?
\$9345.79
12. You want to begin saving for your daughter's college education and you estimate that whe will need \$150,000 in 17 years. If you feel confident that you can earn 8% per year, how much do you need to invest today?
\$40 540.34
13. 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?
\$10,000
14. What is the present value of \$500 to be received in 5 years? 10 years? The discount rate is 10%.
• \$310.46
• \$192.77
15. What is the present value of \$500 received in 5 years if the interest rate is 10%? 15%?
• \$310.46
• \$248.59
16. You are looking at an investment that will pay \$1200 in 5 years if you invest \$1000 today. What is the implied rate of interest?
3.714%
17. Suppose you are offered an investment that will allow you to double your money in 6 years. You have \$10,000 to invest. What is the implied rate of interest?
12.25%
18. Suppose you have a 1-year old son and you want to provide \$75,000 in 17 years towards his college education. You currently have \$5000 to invest. What interest rate must you earn to have the \$75,000 when you need it?
17.27%
19. You want to purchase a new car and you are willling to pay \$20,000. If you can invest at 10% per year and you currently have \$15,000, how long will it be before you have enough money to pay cash for the car?
3.02 years
20. Suppose you want to buy a new house. You currently have \$15,000 and you figure you need to have a 10% down payment. If the type of house you want costs about \$200,000 and you can earn 7.5% per year, how long will it be before you have enough money for the down payment?
3.98 years
21. You need \$50,000 in 10 years. If you can earn 6% interest, how much do you need to invest today?
\$27,920

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 Author: Cluster ID: 49613 Filename: FIN257 - CH 5 Slide Examples Updated: 2010-11-15 03:03:47 Tags: Finance Chapter Slide Examples Folders: Description: Slide Examples Show Answers:

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