Finance Essay

1048 Words Mar 20th, 2013 5 Pages
FI – 360

Chapter 3

P3-1) You have $1,500 to invest today at 7 percent interest compounded annually.

A - How much will you have accumulated in the account at the end of the following number of years? 1). Three years PV x (1.07)^3 $1,500 x (1.07)(1.07)(1.07) $1,500 x 1.225043 = $1837.5645 = $1,837.56

2). Six years PV x (1.07)^6 $1,500 x (1.07)(1.07)(1.07)(1.07)(1.07)(1.07) $1,500 x 1.500730351849 = $2,251.0955 = $2,251.10

3). Nine years PV x (1.07)^9 $1,500 x (1.07)(1.07)(1.07)(1.07)(1.07)(1.07)(1.07)(1.07)(1.07) $1,500 x 1.838459212420155 = $2,757.6888 = $2,757.69

B - Use your findings in part (a) to calculate the amount of interest earned in 1). Years 1 to 3 $1,837.56 -
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Rate of return increase the present value decreases.

P3-5) – You have saved $10,000 towards a down payment on a home. The money is invested in an account earning 7% interest. You will be ready to purchase the new home once your savings accounts grows to $25,000.

A). – Approximately how many years will it take for the account to reach $25,000? 25,000 = 10,000(1+0.07)n
(1.07)n = 25,000/10,000
(1.07)n = = 2.5 n*ln(1.07) = ln(2.5) n = ln(2.5)/ln(1.07) n = 13.54yrs

B) – If the interest rate doubles to 14%, how many years will pass before you reach your $25,000 target? 25,000 = 10,000(1+0.14)n
(1.14)n = 25,000/10,000
(1.14)n = = 2.5 n*ln(1.14) = ln(2.5) n = ln(2.5)/ln(1.14) n = 6.99yrs

P3-10) - Liliana Alvarez’s employer offers its workers a two-month paid sabbatical every seven years. Liliana, who just started working for the firm, plans to spend her sabbatical touring Europe at an estimated cost of $25,000. To finance her trip, Liliana plans to make six annual end-of-year deposits of $2,500 each, starting this year, into an investment account earning 8% interest.

A). - Will Liliana’s account balance at the end of seven years be enough to pay for her trip? $2,500 x 6.8% = 7.3359 = $18,339 x 1.08 = $19,806 Making payments of $2,500 per year, Liliana would not be able travel Europe.

B) - Suppose Liliana increases her annual contribution to $3,150, How large will her account balance be at the end of seven years? $3,150

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