You wish to have an investment that will bring about $20 000 in five years, and...

You wish to have an investment that will bring about $20 000 in five years, and the rate of return is 8% per annum. Required:

a. In term of time value of money, what is the amount of $20,000 represent?

b. How much do you need to invest now if the rate is compounded annually

(to the nearest dollar)?

c. If you have $20,000 now and put the sum into a bank account that pays 5% per year. How much will you have in 6 years if the rate is compounded semi- annually, quarterly, monthly and daily (to the nearest dollar)?

Question 2. Your finance advisor offers you an investment that promise $200 000 in 15 years from now. He said that you will need to contribute an initial investment of $45,000 now. Required:

a. What rate of interest was used in the computation of this investment offer assuming the rate is compounding annually?

b. If you wish to retire in just 10 years from now with the same $200 000 and the rate of return is 12%, how much money would you need to invest now?

c. If you wish to retire with $250 000, using the same initial investment of $45 000 and the rate of return of 15%, how long will you need to wait before you can retire?

Question 3. Fifteen years ago, you deposited $12,500 into an investment fund. Five years ago, you added an additional $20,000 to that account. You earned 8%, compounded semi-annually, for the first ten years, and 6.5%, compounded annually, for the last five years. Required:

a. What is the effective annual interest rate (EAR) you would get for your investment in the first 10 years?

b. How much money do you have in your account today?

c. If you wish to have $85 000 now, how much should you have invested 15 years ago?

Solutions

Expert Solution

Q.1

a) In terms of time value of money, $ 20,000 represent the Future Value of Money.

b) We need to compute present value of money. It is given that, n = 5 years, Rate of Interest = 8% (compounded annually) and Future Value = $20,000

Using Present Value Formula,

PV = $ 13,612

This implies that $ 13,612 invested today at 8% Interest Rate (compounded annually) for 5 years will generate $20,000 as the future value.

For any query or clarification, please leave a comment.

jeff jeffy answered 1 year ago

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