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)

4. Biff deposited $10,000 in a bank account, and 12 years later he closes out the account, which is worth $20,000. What annual rate of interest has he earned over the 12 years? Submit your answer as a percentage and round to two decimal places.

Explanation / Answer

1: Timeline is as follows

Year 1 12

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$ -10,000 $20,000

2: The annual rate of return (Rate ) is to be computed

3: PV= 10000

FV= 20000

N= 12

PMT = 0

4: FV= PV*(1+r)^n

20000= 10000*(1+r)^12

2= (1+r)^12

1+r= 1.059463

r= 5.95%

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