In: Finance
Jody wants to save for her college expenses. She received a $6,000 gift from her grandparents at age 10 and wants to see it increase to $9,000 by the time she turns 15. If she invests all of her gift, what rate of return should be expected to reach her goal of $9,000? For 5 extra credit points, instead of a $6,000 gift, Jody's grandparents deposited $1,200 annually to a savings account and increased the deposits at a rate of 3% annually for 5 years. What is the present value of this investment earning 8% annually?
Calculating Rate of Interest and Present Value of Annuity
a.)Future Value of Single Payment =>
FVn = PV(1+r)n
9000 = 6000(1+r)5
1.5 = (1+r)5
1.51/5 = 1+r
r = 1.084475-1
r = 8.4475%
Please note that r can be calculated with Trial and Error method.
b.) Present Value of a Growth Annuity=>
Formula =
=
=
= 5064.48
Here: P - Annual Payment
r - rate of interest
g - growth rate
n - number of period