Finance

1042 Words Mar 14th, 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 -
…show more content…
20 years 1) - (1.05)^5 x (1.10)^5 x (1.20)^5 =12.727 2) - (1.10)^10 x (1.15)^5 = 10.493 3) – (1.12)^20 = 9.646 #1 has the highest return on investment

C). 30 years 1) – (1.05)^5 x (1.10)^5 x (1.20)^20 = 78.802 2) – (1.10)^10 x (1.15)^20 = 42.451 3) – (1.12)^30 = 29.959 #1 has the highest return on investment

P3-4) – You have a trust fund that will pay you $1 million exactly ten years from today. You want cash now, so you are considering an opportunity to sell the right to the trust fund to an investor.

A). – What is the least you will sell your claim for if you could earn the following rates of return on similar risk investments during the ten-year period? 1) – 6% $1,000,000 x (1.06)^-10
$1,000,000 x .558395 = $558,395

2) – 9% $1,000,000 x (1.09)^-10
$1,000,000 x .422411 = $321,973

3) – 12% $1,000,000 x (1.12)^-10
$1,000,000 x .321973 = $321,973

B) – Rework part (A) under the assumption that the $1 million payments will be received in fifteen rather than ten years.

1) – 6% $1,000,000 x (1.06)^-15
$1,000,000 x .417265 = $417,265

2) – 9% $1,000,000 x (1.09)^-15
$1,000,000 x .274538 = $274,538

3) – 12% $1,000,000 x (1.12)^-15
$1,000,000 x .182696 = $182,696

C) – Based on your findings is part (A) and (B), discuss the effect of both the size of the rate of return and the time until receipt of payments on the present value of a future sum.

The larger the

More about Finance