Use present and future value techniques to answer the questions below. Round all

Question

Use present and future value techniques to answer the questions below. Round all answers to the nearest whole dollar. Round all interest rates used to four dec?mal places, where necessary. TIME VALUE OF MONEY PROBLEMS (a) You wish to accumulate $40,000 in six years in order to have enough money to pay for your child's education. If you can earn an annual rate of 8% on your money, compounded monthly, how much would you have to deposit at the end of each month in order to accomplish this? (b) You are going to open a savings account. You wish to accumulate $25,000 in the account in five years. If you can earn 10% per year on the account, compounded quarterly, how much would you have to deposit today in order to accomplish your goal? (c) What is the present value of a payment of S500 received at the end of each period under the following situations. (1) The $500 is received each quarter. The interest rate is 6% per year, compounded quarterly, and the payments will be received each quarter for ten years. The $500 is received semiannually. The interest rate is 5% per year, compounded semiannually, and the payments will be received for five years. (2)

Explanation / Answer

a

b

c 1

c 2

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Payment required = FV*r /[(1+r)^n -1] Future value FV                        40,000.00 Rate per period r Annual interest 8% Number of interest payments per year 12 Interest rate per period 0.08/12= Interest rate per period 0.667% Number of periods n Number of years 6 Periods per year 12 number of periods 72 Payment required = 40000*0.006667/ [(1+0.006667)^72 -1] =                              435.00

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