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Chapter 6: Q2E (page 303)

Alan Jackson invests $20,000 at 8% annual interest, leaving the money invested without withdrawing any of the interest for 8 years. At the end of the 8 years, Alan withdraws the accumulated amount of money. Instructions (a) Compute the amount Alan would withdraw assuming the investment earns simple interest. (b) Compute the amount Alan would withdraw assuming the investment earns interest compounded annually. (c) Compute the amount Alan would withdraw assuming the investment earns interest compounded semiannually

Short Answer

Expert verified

The amount at the withdrawal using simple interest will be $32,800, Compounded annually will be $37,018, and compounded semi-annually will be $37,459.

Step by step solution

01

Simple Interest

Amountatwithdrawal=Amount+SimpleInterestRate=20,000+20,000×8%×8=$32,800

02

Compounded Annually

Amountatwithdrawal=Amount×Futurevaluefactor=20,000×1.85093=$37,018

03

Compounded Semi-annually

Amountatwithdrawal=Amount×Futurevaluefactor=20,000×1.87298=$37,459

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Most popular questions from this chapter

Consider the following independent situations. (a) Mike Finley wishes to become a millionaire. His money market fund has a balance of \(92,296 and has a guaranteed interest rate of 10%. How many years must Mike leave that balance in the fund in order to get his desired \)1,000,000? (b) Assume that Sally Williams desires to accumulate \(1 million in 15 years using her money market fund balance of \)182,696. At what interest rate must Sally’s investment compound annually?

Answer each of these unrelated questions.

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(e) Fishbone Corporation wants to withdraw \)120,000 (including principal) from an investment fund at the end of each year for 9 years. What should be the required initial investment at the beginning of the first year if the fund earns 11%?

Question:The Kellys are planning for a retirement home. They estimate they will need $200,000 4 years from now to purchase this home. Assuming an interest rate of 10%, what amount must be deposited at the end of each of the 4 years to fund the home price? (Round to two decimal places.)

Danny’s Lawn Equipment sells high-quality lawn mowers and offers a 3-year warranty on all new lawn mowers sold. In 2017, Danny sold \(300,000 of new specialty mowers for golf greens for which Danny’s service department does not have the equipment to do the service. Danny has entered into an agreement with Mower Mavens to provide all warranty service on the special mowers sold in 2017. Danny wishes to measure the fair value of the agreement to determine the warranty liability for sales made in 2017. The controller for Danny’s Lawn Equipment estimates the following expected warranty cash outflows associated with the mowers sold in 2017.

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