Question

1. Tom invests $4,500 today and $2,000 at the end of next year (year 2). What is the total amount in Tom’s account at the end of year 3 if annual interest is 6%?

$7,479.57

$7,056.20

$5,056.20

$6,890.00

$7,000.00

2. How much must Anna have in her investment account on her 65th birthday so that she can withdraw $30,000 on that birthday and on each of the next 19 birthdays (interest rate is 8%)?

$318,108

$294,540

$340,109

$288,120

$264,540

3. John has just won a lottery jackpot. He will get the money in 26 equal installments of $307,692 each, starting immediately. The Finance Company offers him $2,000,000 cash if he signs the payments over to them. What interest is the Finance Company earning on this offer?

17.9%

15%

7.5%

5.5%

7.8%

Answer 1

1)

Initial principal, P1 = $ 4,500

Principal at the end of second year , P2 = $ 2,000

rate = 6%

Total amount at the end of 3 years = P1 *(1+rate)^3 + P2 *(1+rate) = 4500*(1+6%)^3 + 2000*(1+6%) = $ 7479.57

Answer is $7,479.57

2)

Withdrawal amount every year (PMT) = 30,000

Number of withdrawals (nper) = 20

Rate = 8% pa

Amount Anna must have (PV) =  = $ 318,108

3)

Number of instalments (nper) = 26

Installment amount (PMT) = $ 307,692

PV of cash installments (PV) = $ 2,000,000

As excel is not providing the solution directlu,

Using trial and error method, PV of the amount is 2,000,000

So by putting rate = 17.9%, we get = $ 2,000,000 ie

Rate = 17.9%