1. If you deposit $500 in a savings account that offers 4 percent annual interes
ID: 1222251 • Letter: 1
Question
1. If you deposit $500 in a savings account that offers 4 percent annual interest, compounded annually, and you don’t withdraw any money, how much money should you expect to have in the account at the end of three years?
Instructions: Round your answer to two decimal places.
$____ .
2. You run a business and are considering offering a new service. If you offer the new service, you expect it to generate $50,000 in profits each year for your business over the next two years. In order to offer the new service, you will need to take out a loan for new equipment. Assume a 8 percent annual interest rate.
Instructions: Round your answer to two decimal places.
Your loan must be less than $____ in order for future benefits to exceed present costs.
Explanation / Answer
(1) At end of 3 years, future value ($) = 500 x (1.04)3 = 500 x 1.1249 = 562.43
(2) Required loan ($) = 50,000 x PVIFA(8%, 2) = 50,000 x 1.7833 = 89,165.00
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