Suppose that the value of an investment in the stock market has increased at an

Question

Suppose that the value of an investment in the stock market has increased at an average compound rate of about 5% since 1908. It is now 2016.

a. If someone invested $1,000 in 1908, how much would that investment be worth today? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Investnment _________________

b. If an investment from 1908 has grown to $1 million, how much was invested in 1908? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Present Value _________________

Explanation / Answer

Answer a.

Amount Invested = $1,000
Period = 108 years
Interest Rate = 5%

Current Value = Amount Invested * (1 + Interest Rate)^Period
Current Value = $1,000 * 1.05^108
Current Value = $1,000 * 194.28725
Current Value = $194,287.25

Answer b.

Current Value = $1,000,000
Period = 108 years
Interest Rate = 5%

Current Value = Amount Invested * (1 + Interest Rate)^Period
$1,000,000 = Amount Invested * 1.05^108
$1,000,000 = Amount Invested * 194.28725
Amount Invested = $5,147.02

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