Question

6.  How long would it take for a deposit of $1,200 to become $16,000 if you can earn 9.5% on your money?

7.  A risk-free investment promises to pay you $650 every 6 months for the next 11 years.  If you can earn 9.5% on your money, how much would you be willing to pay for this investment?

Answer 1

6.

FV = PV x (1+i)ⁿ

where FV is future value

PV is present value

i is % earnings on my investment

n is number of years

FV = PV x (1+i)ⁿ

16000 = 1200 x (1+0.095)ⁿ

1.095ⁿ = 13.333333

Using excel or financial calculator or log function,

n = 28.54 years

7.

Above problem is annuity problem,

where amount of annuity (PMT) = $650

No. of 6 monthly annuities receivable (n) = 11 years x 2 =22

Rate of interest per half year (i) = 9.5%/2 = 4.75%

Amount I would be willing to pay (PV of annuity) = ?

PV = PMT x [1-1/(1+i)ⁿ] / i

Therefore PV = 650 x [1-1/(1.0475)²²] / 0.0475

Therefore PV = $8754.39

Amount I would be willing to pay for this investment = $8754.39

Thumbs up please if satisfied. Thanks :)

Comment if further doubts in above.