4-1 If you deposit $10,000 in a bank account that pays 10% interest annually, ho

Question

4-1 If you deposit $10,000 in a bank account that pays 10% interest annually, how much will be in your account after 5 years? 4-2 What is the present value of a security that will pay $5,000 in 20 years if securities of equal risk pay 7% annually? 4-12 Find the future value of the following annuities. The first payment in these annuities is made at the end of Year 1, so they are ordinary annuities. (Notes: See the Hint to Problem 4-9. Also, note that you can leave values in the TVM register, switch to Begin Mode, press FV, and find the FV of the annuity due.) a. $400 per year for 10 years at 10% b. $200 per year for 5 years at 5% c. $400 per year for 5 years at 0%

Explanation / Answer

4-1)

Principal(P) =$10,000

Rate of interest(r) = 10%annual

Years(n)= 5%

Amount= P(1+r/100)^n

=10,000(1+0.10)^5

=$16,105.1

4-2)

Future Value =$5000

Years= 20

Discounting=7%

Use the following equation to calculate present value:

Present Value =          Future Value X (Present Value Interest Factor (PVIF) )

                        =          $5,000             X (1/1.07) ^ 20 years

                        =          $5,000 X 0.258

                        =          $1,290

4-3)

where C= cash flow per period

i= rate of interest and n= no of years

Using the above formula,

a) $400 per year for 10 years at 10%, FV=400*(((1+0.10)^10)-1))/0.10=$6360

b)$200 per year for 5 years at 5%, FV= 200*(((1+0.5)^5)-1))/0.5=$1105.12

c. $400 per year for 5 years at 0%, FV=5*400= $2000

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