Question

QUESTION 4

1. You want to start an accounting business and estimate it will take $14,000 to get started. If you can deposit $4,000 today, and an additional $1,000 at the end of each quarter, how long until you can start your business, assuming you can earn 5.1% compounded quarterly?

   		4.70 quarters
   		4.76 quarters
   		9.04 quarters
   		8.94 quarters

1.66 points   

QUESTION 5

1. Michelle wants to start college in 3 years, and figures that she needs to save up $10,500 between now and then to help pay for her tuition and living expenses. How much should Michelle set aside at the beginning of each month to reach this goal, assuming her savings earn 3.7% compounded monthly?

   		$275.38
   		$276.23
   		$138.83
   		$3,478.51

1.66 points   

QUESTION 6

1. Gretchen Swane sold her business for $525,000 and deposits the money in a savings plan that earns 5.75% compounded monthly. If she wants to live off the interest without withdrawing any of the principal, what amount will Gretchen be able to withdraw at the end of each month?

   		$7,608.70
   		$2.275.00
   		$30,187.50
   		$2,515.63

1.66 points   

QUESTION 7

1. A wealthy citizen sets up a trust for scholarships at a local community college. The gift is for $3,500,000 and the money is distributed at the beginning of each year for the next 175 years. If the trust earns 5.25% compounded annually, how much is available for scholarships each year?

   		$174,606.88
   		$183,773.74
   		$194,856.72
   		$204,100.66

Answer 1

1)

Future value = Present value * (1 + interest rate / Compounding frequency)^{(no of years* Compounding frequency)} + Quarterly Contribution * ((1 + interest rate / Compounding frequency)^{(no of years * Compounding frequency)} - 1) / (interest rate / Compounding frequency)

$14,000 = $4000 * (1 + (5.1% / 4))^{(no of periods * 4)} + $1000 * ((1 + 5.1% / 4)^{(no of periods * 4)} - 1) / (5.1% / 4)

Using the Texas Instruments BA 2 plus calculator

SET PV = -4000, PMT = -1000, FV = 14000, I/Y = 5.1 / 4 = 1.275

CPT --> N = 9.04

No of Quarters required = 9.04 quarters

2)

Monthly Contribution required at the end of each month

Monthly Contribution = Fund required * ((interest rate / Compounding frequency) / (1 - (1 + interest rate / Compounding frequency)^{-(no of years * Compounding frequency)})

Monthly Contribution = $10,500 * (3.7% / 12) / (1 - (1 + (3.7% / 12))^{(3 * 12)}

Monthly Contribution required at the end of each month = $276.23

Monthly Contribution required at the beginning of each month = Monthly Contribution required at the end of each month / (1 + interest rate / Compounding frequency)

Monthly Contribution required at the beginning of each month = $276.23 / (1 + (3.7% / 12))

Monthly Contribution required at the beginning of each month = $275.38

3)

Monthly Interest received = Principal * (Interest rate / Compounding frequency)

Monthly Interest received = $525,000 * (5.75% / 12)

Monthly Interest received = $2515.63

4)

Annual Amount available for scholarship = Principal * (interest rate / (1 - (1 + interest rate)^{-no of periods})

Annual Amount available for scholarship = $3,500,000 * (5.25% / (1 - (1 + 5.25%)^-175)

Annual Amount available for scholarship = $183,773.74