Question

Linda Roy received a $221,000 inheritance after taxes from her parents. She invested it at 5.5% interest compounded quarterly for 6 years. A year later, she sold one of her rental properties for $231,000 and invested that money at 4.5% compounded semiannually for 5 years. Both of the investments have matured. She is hoping to have at least $521,000 in 10 years compounded annually at 3.5% interest so she can move to Hawaii.

Future Value of Inheritance Investment: $

Future Value of Rental Property Investment: $

Present Value of Final Investment: $

Future Value of Final Investment: $

Will she meet her goal?

Answer 1

PV = FV/(1+r)^n

PV - Present value

FV - Future value

r - Interest rate

n - no. of periods

Future value of inheritance

PV = 221000

n = 6*4 = 24

R = 0.055/4

FV = 221000*(1+0.055/4)^24 = $306713.64

Future value of rental property investment:

PV = 231000

R = 0.045/2

n = 5*2 = 10

FV = 231000*(1+0.045/2)^10 = $288565.99

Total future value = 306713.64 + 288565.99 = $595279.63

Present value of final investment

FV = 595279.63

PV = 221000 + 231000/(1+0.055/4)^4 = $439720.01

Future value of final investment:

PV = 595279.63

R = 0.035

N = 10

FV = 595279.63*(1+0.035)^10 = $839700.71

Yes. She meets the goal, as the future value is higher than $521000