Question

1. Derek will deposit $1,692.00 per year into an account starting today and ending in year 5.00. The account that earns 14.00%. How much will be in the account 5.0 years from today?

2. Derek has the opportunity to buy a money machine today. The money machine will pay Derek $10,304.00 exactly 15.00 years from today. Assuming that Derek believes the appropriate discount rate is 14.00%, how much is he willing to pay for this money machine?

Answer 1

1.Information provided:

Annual deposit= $1,692

Time= 5 years

Interest rate= 14%

The question is solved by calculating the future value of annuity due.

This can be solved using a financial calculator by inputting the below into the calculator:

The financial calculator is set in the end mode.  Annuity due is calculated by setting the calculator to the beginning mode (BGN). To do this, press 2^ndBGN 2^ndSET on the Texas BA II Plus calculator

Enter the below in a financial calculator in BGN mode to compute the future value of ordinary annuity:

PMT= -1,692

N= 5

I/Y= 14

Press the CPT key and FV to compute the future value of annuity due.

The value obtained is 11,184.30.

Therefore, $11,184.30 will be in the account 5 years from now.

2.Information provided:

Future value= $10,304

Interest rate= 14%

Time= 15 years

The question is solved by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 10,304

I/Y= 14

N= 15

Press the CPT key and PV to compute the present value.

The value obtained is 1,443.55.

Therefore, Derek will be willing to pay $1,443.55 for the money machine.