Concept explainers
The Rule of 72 This is a continuation of Exercise 14. Financial advisors sometimes use a rule of thumb known as Rule of 72 to get a rough estimate of the time it takes for an investment to double in value. For an investment that is compounded yearly at an interest rate of
For the remainder of this exercise, we will consider an investment that is compounded yearly at an interest rate of
a. According to the Rule 72, how long will it take the investment to double in value?
Parts b and c of this exercise will check to see how accurate this estimate is for this particular case.
b. Using the answer you got from part a of this exercise, calculate the future value interest factor (as defined in Exercise 14). Is it exactly the same as your answer to the part a of Exercise 14?
c. If your initial investment was
Future Value Business and finance texts refer to the value of an investment at a future time as its future value. If an investment of P dollars is compounded yearly at an interest rate of
In this formula,
Financial officers normally calculate this (or look it up in a table)
a. What future value interest factor will make an investment double?
b. Say you have an investment that is compounded yearly at a rate of
Find the future value interest factor for a 7-year investment.
c. Use the results from part b to calculate the 7-year future value if your initial investment is
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Functions and Change: A Modeling Approach to College Algebra (MindTap Course List)
- Depreciation Once a new car is driven away from the dealer, it begins to lose value. Each year, a car loses 10% of its value. This means that each year the value of a car is 90% of the previous year’s value. If a new car was purchased for $20,000, the value at the end of the first year would be $20000(0.90) and the value of the car after the end of the second year would be $20000(0.90)2. Complete the table shown below. What will be the value of the car at the end of the eighth year? Simplify the expression, to show the value in dollars.arrow_forwardAn Uncertain Investment Suppose you invested 1300 in the stock market two years ago. During the first year the value of the stock increased by 12%. During the second year, the value of the stock decreased by 12%. How much money is your investment worth at the end of the two-year period? Did you earn money or lose money? Note: The answer to the first question is not 1300arrow_forwardThe annual percentage yield (APY) of an investmentaccount is a representation ofthe actual interest rateearned on a compounding account. It is based on acompounding period of one year. Show that the APYof an account that compounds monthly can be foundwith the formula APY=(1+r12)121.arrow_forward
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