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Homework Answers
1) If initial investment is $ 35,000 invested for 7 years with 11% p. a compound interest rate. Then after 7 years total Accumulated fund = $ 35,000 X PVIFA of 11% for 7 years
Accumulated fund = $ 35,000 X 2.07616 = $ 72,665.6 or $ 72,666
2) Interest rate = 12% p. a
His initial investment =[ $ 53,000/1.12] + [ $ 53,000/1.2544] + [ $ 53,000 / 1.4049] + [ $ 53,000 / 1.5735] + [ $ 53,000 / 1.7623] = $ 47321.43 + $ 42,251.28 + $ 37,725.10 + $ 33,682.87 + $ 30,074.33 = $ 191,055.01 or $ 191,055 [ or $ 191,054 for marginal fractions of decimal ]
Note for understanding compounding of interest :
1st year = 1 X 112% = 1.12 [ 100% for principal and 12% interest rate.]
2nd year = 1.12 X 112% = 1.2544
3rd year = 1.2544 X 112% = 1.4049
4th year = 1.4049 X 112% = 1.5735
5th year = 1.5735 X 112% = 1.7623
3) Present value of 1st option of payment :-
Present value = $ 790 + [ $ 1,450 X present value factor at 7% interest for 7 years]
Present value of payment option 1 = $ 790 + [ $ 1,450 X 0.62275] = $ 1,692.99 or $ 1,693
Present value of option 2:-
Present value of 2nd option = $ 2,800 X present value factor at 7% interest for 8 years
Present value of 2nd option = $ 2,800 X 0.58201 = $ 1,629.63 or $ 1,630
So, payment option 2 will be more preferable on the basis of present value basis.
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