Instructions: You are required to show the following 4 steps for each problem :

Question

Instructions:

You are required to show the following 4 steps for each problem : (i) Develop the timeline (linear representation of the timing of cash flows) (ii) Identify the time value of money variable (PV, FV, PMT, N or Rate) which needs to be calculated in the question. (iii) Identify the values of the remaining four variables (PV, FV, PMT, N or Rate) from the question. Be sure to input positive or negative signs. (iv) Calculate the correct value of the variable identified in step (ii).

Problem:

At what rate must $287.50 be compounded annually for it to grow to $572.86 in 8 years? Submit your answer as a percentage and round to two decimal places.

Explanation / Answer

(i) Develop the timeline (linear representation of the timing of cash flows)

Year 0 |------------------------------------| Year 8

Year-0 = Cash outflow = -$287.50 and Year-8 = Cash inflow = $572.86

(ii) Identify the time value of money variable (PV, FV, PMT, N or Rate) which needs to be calculated in the question.

(iii) Identify the values of the remaining four variables (PV, FV, PMT, N or Rate) from the question. Be sure to input positive or negative signs.

PV = -$287.50; FV = $572.86; PMT = 0 ; N = 8 years ; Rate = ?

(iv) Calculate the correct value of the variable identified

Using financial calculator BA II Plus - Input details:

#

FV = Future Value / Face Value =

$572.86

PV = Present Value =

-$287.50

N = Number of years remaining x frequency =

8

PMT = Payment = Coupon / frequency =

CPT > I/Y = Rate = YTM =

                       9.00

Convert rate in yearly rate =

9.00%

Using financial calculator BA II Plus - Input details:

#

FV = Future Value / Face Value =

$572.86

PV = Present Value =

-$287.50

N = Number of years remaining x frequency =

8

PMT = Payment = Coupon / frequency =

CPT > I/Y = Rate = YTM =

                       9.00

Convert rate in yearly rate =

9.00%

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