Question

A) Daniel Finley wishes to become a millionaire. His money market fund has a balance of $109,333 and has a guaranteed interest rate of 10%. How many years must Daniel leave that balance in the fund in order to get his desired $979,000?

B) He then desires to accumulate $979,000 in 15 years using his money market fund balance of $187,154. At what interest rate must Daniels investment compound annually?

C)

Answer 1

ANSWER:

Part A)

We will have to use the formula for calculating future value of 1 to arrive at the number of years it will take to reach $979,000.

The formula for calculating future value is:

Future Value = P*(1+Rate)^n

where P = Present Sum/Prinicpal,

Rate = Interest Rate and

n = Years

____________

Substituting the information provided in the question in the above formula, we get,

979,000 = 109,333*(1+10%)^Years

Rearranging values, we get,

(1+10%)^Years = 979,000/109,333 = 8.95430

Locating this value in the the column of 10% in the future value tables , we can find the years.

Years = 23 Years (answer) [8.95430 is appearing against 23 years in the 10% interest rate column in the future value table]

__________________

Part B)

We will have to use the formula for calculating future value of 1 to arrive at the interest rate it will take to reach $979,000.

The formula for calculating future value is:

Future Value = P*(1+Rate)^n

where,

P = Present Sum/Prinicpal,

Rate = Interest Rate and

n = Years

____________

Substituting the information provided in the question in the above formula, we get,

979,000 = 187,154*(1+Rate)^15

Rearranging values, we get,

(1+Rate)^15 = 979,000/187,154 = 5.230986

Locating this value in the the row of 15 years in the future value tables , we can find the interest rate.

Interest Rate = 12% (nearest answer).

[5.230986 is appearing against 12% interest rate in the 15 years row in the future value table]