Questions and Problems
1. Assume that you deposit $5,000 in an account earning 6% simple interest for 3 years. Show your work.
What is the accumulated interest at the end of 3rd year?___________________
What is the present value?________________________
What is the future value?_________________________
2. Assume that you deposit $5,000 in an account earning 6% compound interest for 3 years. Please solve without using tables. Show your work.
What is the accumulated interest at the end of 3rd year?____________________
What is the present value?________________________
What is the future value?_________________________
3. How large will a deposit of $15,000 today become at a compound interest rate of 5% for 7 years. Use Table A.1 to solve. Show your work.
4. How large of a deposit do you need to make today if you need it to grow to $20,000 in 10 years at a discount rate of 4%? Use Table A.2 to solve. Show your work.
5. The current production target for the 6-year plan of XYZ Company is to increase output by 7 percent per year. If the 2000 production is 2.76 million tons, what is the target production for 2006? Use Table A.1 to solve. Show your work.
6. Use the "Rule of 72" to estimate your answer and then use Table A.1 in the textbook to answer the following :
At a growth rate of 5 percent, how long does it take a sum to double?
Answers: Rule of 72_________________
Table A.1 _________________
Explain your answers. How accurate was your answer using the Rule of 72? How could this estimating tool be used in business and in your everyday life?
7. If, at age 35, you open an IRA account paying 6 percent annual interest and you put $2,000 in at the end of each year, what will your balance be at age 65? Use Table A.3 to solve. Show your work.
8. You are offered two alternatives: a $2,000 annuity for 10 years or a lump sum today. If current interest rates are 6 percent, how large will the lump sum have to be to make you indifferent between the alternatives? Use Table A.4 to solve. Show your work.
9. You have a $10,000 CD at the bank. The interest rate is 3% compounded quarterly for 1 year. What is the Effective Annual Rate (EAR)? Show your work.
10. You have a $10,000 CD at the bank. The interest rate is 3% compounded semi-annually for 1 year. What is the Effective Annual Rate (EAR)? Show your work.