Question

Future Value Computation Kate Company deposited $12,000 in the bank today, earning eight percent interest. Kate plans to withdraw the money in five years. How much money will be available to withdraw assuming that interest is compounded (a) annually, (b) semiannually, and (c) quarterly? Use Excel or a financial calculator for computation. Round answers to the nearest dollar.

(a) Annually...... Answer 0

(b) Semiannually....... Answer 0

(c) Quarterly....... Answer 0

Answer 1

Present Value = $12000

Interest Rate = 8% = 8 / 100 = 0.08

Term = 5 years

(a)

Future Value = Present Value X (1 + Rate) ^n

Number of terms if compounded annually = 5

Therefore, Future value if compounded annually = 12000 X (1 + 0.08) ^5 = 12000 X (1.08) ^5 = 12000 X 1.469328 = $17,631.94 = $17,632.

(b)

Future Value = Present Value X (1 + Rate) ^n

Number of terms if compounded semi-annually = 5 X 2 = 10

Interest Rate if semi-annual = 8% / 2 = 4% = 4 / 100 = 0.04

Therefore, Future value if compounded semi-annually = 12000 X (1 + 0.04) ^10 = 12000 X (1.04) ^10 = 12000 X 1.480244 = $17,762.93 = $17,763.

(c)

Future Value = Present Value X (1 + Rate) ^n

Number of terms if compounded quarterly = 5 X 4 = 20

Interest Rate if quarterly = 8% / 4 = 2% = 2 / 100 = 0.02

Therefore, Future value if compounded quarterly = 12000 X (1 + 0.02) ^20 = 12000 X (1.02) ^20 = 12000 X 1.485947 = $17,831.37 = $17,831.