Chapter 11.II, Problem 20RE

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8th Edition

Robert Brechner + 1 other

ISBN: 9781305585447

Textbook Problem

Solve the following word problems by using Table 11 -2.

Stuart Daniels estimates that he will need $25,000 to set up a small business in 7 years.

a. How much must Stuart invest now at 8% interest compounded quarterly to achieve his goal?

b. How much compound interest will he earn on the investment?

**(a)**

To determine

**To calculate:** The present value (principal) for an investment with compound amount

Explanation

**Given information:**

An investment with compound amount

**Formula used:**

Compounding period can be defined as the duration or length of time from one interest payment to the next. If an investment made for 4 years at

Here, *m* is the period per year.

The interest rate per period can be calculated by dividing the annual, or nominal, rate by the number of periods per year,

The present value (principal) can be calculated by the formula given below:

In table 11-2, the table factor is the intersection of the rate-per-period column and the number-of-periods row is the present value of

When the number of periods of an investment is greater than the number of periods provided by the present value table, then compute a new table factor by following below steps:

1. For the stated interest rate per period, find the two table factors that represent half, or values as close as possible to half, of the periods required.

2. Multiply the two table factors from step 1 to form the new factor.

3. Round the new factor to five decimal places.

**Calculation:**

Consider the compound amount

Since, the variables- compound amount, time period (years), nominal rate and interest compounded are given; therefore, the compounding period can be calculated as below:

**(b)**

To determine

**To calculate:** The compound interest for an investment with compound amount

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