Question

16) Stephen's grandmother deposited $100 in an investment account for him when he was born, 25 years ago. The account is now worth $1,500. What was the average rate of return on the account?

17)The present value of $400 to be received at the end of 10 years, if the discount rate is 5%, is __

18)The present value of $1,000 to be received at the end of five years, if the discount rate is 10%, is __

19)What is the present value of an investment that pays $400 at the end of three years ; and $700 at the end of 10 years if the discount rate is 5%?  

20)Three years from now, Barbara Waters will purchase a laptop computer that will cost $2,250. Assume that Barbara can earn 6.25% (compounded annually) on her money. How much should she set aside today for the purchase?

Answer 1

16.We use the formula:  
A=P(1+r/100)^n
where
A=future value
P=present value  
r=rate of interest
n=time period.

1500=100*(1+r/100)^25

(1500/100)^(1/25)=(1+r/100)

(1+r/100)=1.1144

r=1.1144-1

=11.44%(Approx)

17.Present value=Cash flows*Present value of discounting factor(rate%,time period)

=400/1.05^10

=400*0.613913254

=$245.57(Approx)

18.Present value=Cash flows*Present value of discounting factor(rate%,time period)

=1000/1.1^5

=1000*0.620921323

=$620.92(Approx)

19.Present value=Cash flows*Present value of discounting factor(rate%,time period)

=400/1.05+400/1.05^2+400/1.05^3+700/1.05^10

=$1519.04(Approx)

20.Present value=2250*Present value of discounting factor(rate%,time period)

=2250/1.0625^3

=2250*0.833706493

=$1875.84(Approx)