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Chapter 6: Question 1BE (page 302)

Chris Spear invested $15,000 today in a fund that earns 8% compounded annually. To what amount will the investment grow in 3 years? To what amount would the investment grow in 3 years if the fund earns 8% annual interest compounded semiannually?

Short Answer

Expert verified

The investment will grow to $18,896 in 3 years, and if the investment earns 8% interest compounded semi-annually, the investment will grow to $18,980

Step by step solution

01

Calculation of investment growth in 3 years

FV=PV(FVFn,i)=15,000×(1.25971)=$18,896

02

Calculation of investment growth in 3 years if the fund earns 8% interest compounded semi-annually

FV=PV(FVFn,i)=15,000×(1.26532)=18,980

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Most popular questions from this chapter

Andrew Bogut just received a signing bonus of \(1,000,000. His plan is to invest this payment in a fund that will earn 8%, compounded annually. Instructions (a) If Bogut plans to establish the AB Foundation once the fund grows to \)1,999,000, how many years until he can establish the foundation? (b) Instead of investing the entire \(1,000,000, Bogut invests \)300,000 today and plans to make 9 equal annual investments into the fund beginning one year from today. What amount should the payments be if Bogut plans to establish the $1,999,000 foundation at the end of 9 years?

Consider the loan in BE6-16. What payments must Zach Taylor make to settle the loan at the same interest rate but with the 6 payments beginning on the day the loan is signed?

Using the appropriate interest table, compute the present values of the following periodic amounts due at the end of the designated periods. (a) \(30,000 receivable at the end of each period for 8 periods compounded at 12%. (b) \)30,000 payments to be made at the end of each period for 16 periods at 9%. (c) $30,000 payable at the end of the seventh, eighth, ninth, and tenth periods at 12%

Question: What is the time value of money? Why should accountants have an understanding of compound interest, annuities, and present value concepts?

Answer the following questions related to Dubois Inc.

(a) Dubois Inc. has \(600,000 to invest. The company is trying to decide between two alternative uses of the funds. One alternative provides \)80,000 at the end of each year for 12 years, and the other is to receive a single lump-sum payment of \(1,900,000 at the end of the 12 years. Which alternative should Dubois select? Assume the interest rate is constant over the entire investment.

(b) Dubois Inc. has completed the purchase of new Dell computers. The fair value of the equipment is \)824,150. The purchase agreement specifies an immediate down payment of \(200,000 and semiannual payments of \)76,952 beginning at the end of 6 months for 5 years. What is the interest rate, to the nearest percent, used in discounting this purchase transaction?

(c) Dubois Inc. loans money to John Kruk Corporation in the amount of \(800,000. Dubois accepts an 8% note due in 7 years with interest payable semiannually. After 2 years (and receipt of interest for 2 years), Dubois needs money and therefore sells the note to Chicago National Bank, which demands interest on the note of 10% compounded semiannually. What is the amount Dubois will receive on the sale of the note?

(d) Dubois Inc. wishes to accumulate \)1,300,000 by December 31, 2027, to retire bonds outstanding. The company deposits \(200,000 on December 31, 2017, which will earn interest at 10% compounded quarterly, to help in the retirement of this debt. In addition, the company wants to know how much should be deposited at the end of each quarter for 10 years to ensure that \)1,300,000 is available at the end of 2027. (The quarterly deposits will also earn at a rate of 10%, compounded quarterly.) (Round to even dollars.)
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