Question

Answer each of the following independent questions. Ignore personal income taxes.

Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.)

Required:

Suppose you invest $4,500 in an account bearing interest at the rate of 14 percent per year. What will be the future value of your investment in five years?

Your best friend won the state lottery and has offered to give you $12,000 in four years, after he has made his first million dollars. You figure that if you had the money today, you could invest it at 12 percent annual interest. What is the present value of your friend’s future gift?

In four years, you would like to buy a small cabin in the mountains. You estimate that the property will cost you $72,500 when you are ready to buy. How much money would you need to invest each year in an account bearing interest at the rate of 6 percent per year in order to accumulate the $72,500 purchase price?

You have estimated that your educational expenses over the next four years will be $15,000 per year. How much money do you need in your account now in order to withdraw the required amount each year? Your account bears interest at 10 percent per year.

Answer 1

	Future value=Principal (1+Interest rate)^Duration
	Future value=4500*(1+0.14)^5=4500*1.925=8664
	Present value =12000*[(1/1.12)^4]=12000*0.6355=$7626
	Money need to invest in each year=Property cost/Present value of interest rate for 4 years=72500/3.465=$ 20923.52
	Present value of future payments:
	Year	Required Amount	PV @ 10%	Present value
	1	15000	0.909091	13636.36
	2	15000	0.826446	12396.69
	3	15000	0.751315	11269.72
	4	15000	0.683013	10245.2
				47547.98
	Total amount need to be in the account=$47547.98