Question

Today, Georgia is investing $24,000 at 5.5 percent, compounded annually, for 6 years. How much additional income could she earn If she had invested this amount at 6.5 percent, compounded annually?

Answer 1

Answer to Question 1:

If interest rate is 5.50%:

Future Value = Amount Invested * (1 + Interest Rate)^Time Period
Future Value = $24,000 * 1.0550^6
Future Value = $24,000 * 1.378843
Future Value = $33,092.23

If interest rate is 6.50%:

Future Value = Amount Invested * (1 + Interest Rate)^Time Period
Future Value = $24,000 * 1.0650^6
Future Value = $24,000 * 1.459142
Future Value = $35,019.41

Additional Income Earned = $35,019.41 - $33,092.23
Additional Income Earned = $1,927.18

Answer to Question 2:

Part a:

Present Value = $1,050/1.09 + $880/1.09^2 + $1,470/1.09^3 + $1,830/1.09^4
Present Value = $4,135.51

Part b:

Present Value = $1,050/1.17 + $880/1.17^2 + $1,470/1.17^3 + $1,830/1.17^4
Present Value = $3,434.69

Part c:

Present Value = $1,050/1.23 + $880/1.23^2 + $1,470/1.23^3 + $1,830/1.23^4
Present Value = $3,024.80