Question

Investments in the stock market have increased at an average compound rate of about 5% since 1903. It is now 2012.

a.	If you invested $1,000 in the stock market in 1903, how much would that investment be worth today? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Investment

$

b.	If your investment in 1903 has grown to $1 million, how much did you invest in 1903? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Present value

$

Answer 1

Amount Invested in 1903 = $1000

Average compound rate of about 5% since 1903

a). Calculating the Future value of Investment in year 2012:-

Future Value = Amount Invested*(1+r)^n

where, r = Average compound rate = 5%

n = no of years = 109 years

Future Value = $1000*(1+0.05)^109

Future Value = $1000*204.001611734

Future Value = $204001.61

So, investment be worth today is $204,001.61

b). Investment in 1903 has grown to $1,000,000 in 2012

Calculating the Present value of Investment made in year 1903:-

Future Value = Amount Invested*(1+r)^n

where, r = Average compound rate = 5%

n = no of years = 109 years

$1,000,000 = Amount Invested*(1+0.05)^109

Amount Invested = $1000,000/204.001611734

Amount Invested in 1903 = $4901.92