Fox & Co. invests $630,000 in a project expected to earn a 12% annual rate of re

Question

Fox & Co. invests $630,000 in a project expected to earn a 12% annual rate of return. The earnings will be reinvested in the project each year until the entire investment is liquidated 10 years later. What will the cash proceeds (rounded) be when the project is liquidated?

       1,956,700
       1,966,700
       1,976,700
       1,986,700
       1,996,700

What is the amount of money (rounded) that can be borrowed today with a single future payment of $40 in three years at 4% interest?

       33,560
       35,560
       37,560
       39,560
       41,560

Thanks!

Explanation / Answer

(1.) Present Principal (P) = $630,000

Annual Rate of Return (r) = 12% = 0.12

Duration of the investment (n) = 10 years

Amount of cash proceeds on liquidation (A) = P (1 + r)n = $ 630,000 * (1.12)10 = $ 1,956,684.37

= 1,956,700 (rounded).

(2.) Amount of future payment (A) = $ 40

Annual Rate of Interest (r) = 4% = 0.04

Duration of the loan (n) = 3 years

Present Borrowing (P) = A / (1 + r)n = $ 40 / (1.04)3 = $ 35.559

= 35,560 (rounded).

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