9/15/2020 Assignment Print View

Score: 20/150 Points 13.33 %

 
 1. Award: 10 out of 10.00 points
 

First City Bank pays 6 percent simple interest on its savings account balances, whereas Second City Bank pays 6 percent interest compounded
annually. If you made a $9,000 deposit in each bank, how much more money would you earn from your Second City Bank account at the end of
10 years? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)

Difference in accounts $ 1,717.00

First City Bank pays 6 percent simple interest on its savings account balances, whereas Second City Bank pays 6 percent interest compounded
annually. If you made a $9,000 deposit in each bank, how much more money would you earn from your Second City Bank account at the end of
10 years? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)

Difference in accounts $ 1,717.63 ± 0.1%

 
Explanation:

0 10

$9,000 FV

The simple interest per year is:

$9,000 × 0.06 = $540

So, after 10 years, you will have:

$540 × 10 = $5,400 in interest.

The total balance will be $9,000 + 5,400 = $14,400

With compound interest, we use the future value formula:

FV = PV(1 + r)t

FV = $9,000(1.06)10 = $16,117.63

The difference is:

$16,117.63 – 14,400 = $1,717.63

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

Enter 10 6% −$9,000
N I/Y PV PMT FV
Solve for $16,117.63
$16,117.63 – 14,400 = $1,717.63

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9/15/2020 Assignment Print View
 
 2. Award: 10 out of 10.00 points  

Compute the future value of $2,000 compounded annually for (Do not round intermediate calculations. Round the final answers to 2
decimal places. Omit $ sign in your response.)

a-i 10 years at 7 percent.

Future value $ 3,934.30

a-ii. 10 years at 12 percent.

Future value $ 6,211.70

a-iii. 15 years at 7 percent.

Future value $ 5,518.06

b. Not available in connect

Compute the future value of $2,000 compounded annually for (Do not round intermediate calculations. Round the final answers to 2
decimal places. Omit $ sign in your response.)

a-i 10 years at 7 percent.

Future value $ 3,934.30 ± 0.1%

a-ii. 10 years at 12 percent.

Future value $ 6,211.70 ± 0.1%

a-iii. 15 years at 7 percent.

Future value $ 5,518.06 ± 0.1%

b. Not available in connect

 
Explanation:

To find the future value of a lump sum, we use:

FV = PV(1 + r)t

a-i
0 10
$2,000 FV

FV = $2,000(1.07) 10 = $3,934.30
a-ii.
0 10

$2,000 FV

FV = $2,000(1.12)10 = $6,211.70

a-iii
0 15
$2,000 FV

FV = $2,000(1.07)15 = $5,518.06

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

Enter 10 7% −$2,000
N I/Y PV PMT FV
Solve for $3,934.30

Enter 10 12% −$2,000

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9/15/2020 Assignment Print View
N I/Y PV PMT FV
Solve for $6,211.70

Enter 15 7% −$2,000
N I/Y PV PMT FV
Solve for $5,518.06

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9/15/2020 Assignment Print View
 
 3. Award: 0 out of 10.00 points  

Solve for the unknown number of years in each of the following: (Do not round intermediate calculations and round your final answers to 2
decimal places.)

Interest
Present Value Years Rate Future value
$ 460 n/r 10% $ 1,142
710 n/r 11 1,553
17,400 n/r 16 203,139
20,500 n/r 13 249,238

Solve for the unknown number of years in each of the following: (Do not round intermediate calculations and round your final answers to 2
decimal places.)

Interest
Present Value Years Rate Future value
$ 460 9.54 ± 1% 10% $ 1,142
710 7.50 ± 1% 11 1,553
17,400 16.56 ± 1% 16 203,139
20,500 20.44 ± 1% 13 249,238

 
Explanation:

We can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. We will use the FV formula,
that is:

FV = PV(1 + r)t

Solving for t, we get:

t = ln(FV / PV) / ln(1 + r)

0 ?

–$460 $1,142

FV = $1,142 = $460(1.10)t; t = ln($1,142 / $460) / ln 1.10 = 9.54 years

0 ?

–$710 $1,553

FV = $1,553 = $710 (1.11)t; t = ln($1,553 / $710) / ln 1.11 = 7.50 years

0 ?

–
$203,139
$17,400

FV = $203,139 = $17,400(1.16)t; t = ln($203,139 / $17,400) / ln 1.16 = 16.56 years

0 ?

–
$249,238
$20,500

FV = $249,238 = $20,500(1.13)t; t = ln($249,238 / $20,500) / ln 1.13 = 20.44 years

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

Enter 10% −$460 $1,142

N I/Y PV PMT FV
Solve for 9.54

Enter 11% −$710 $1,553

N I/Y PV PMT FV

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9/15/2020 Assignment Print View
Solve for 7.50

Enter 16% −$17,400 $203,139

N I/Y PV PMT FV
Solve for 16.56

Enter 13% −$20,500 $249,238

N I/Y PV PMT FV
Solve for 20.44

 
 4. Award: 0 out of 10.00 points  

Find the EAR in each of the following cases: (Do not round intermediate calculations. Round the final answers to 2 decimal places. Use
365 day a year for calculations.)

Stated
Number of times
rate
compounded
(APR) Effective rate (EAR)
9.5% Quarterly n/r %
16.2 Monthly n/r %
16.3 Daily n/r %
22.6 Infinite n/r %

Find the EAR in each of the following cases: (Do not round intermediate calculations. Round the final answers to 2 decimal places. Use
365 day a year for calculations.)

Stated
Number of times
rate
compounded
(APR) Effective rate (EAR)
9.5% Quarterly 9.84 ± 1% %
16.2 Monthly 17.46 ± 1% %
16.3 Daily 17.70 ± 1% %
22.6 Infinite 25.36 ± 1% %

 
Explanation:

For discrete compounding, to find the EAR, we use the equation:

EAR = [1 + (APR / m)]m – 1

EAR = [1 + (0.095 / 4)]4 – 1= 0.0984 or 9.84%

EAR = [1 + (0.162 / 12)]12 – 1= 0.1746 or 17.46%

EAR = [1 + (0.163 / 365)]365 – 1= 0.1770 or 17.70%

To find the EAR with continuous compounding, we use the equation:

EAR = er – 1
EAR = e0.226 – 1 = 0.2536 or 25.36%

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9/15/2020 Assignment Print View
 
 5. Award: 0 out of 10.00 points
 

Find the APR, or stated rate, in each of the following cases: (Do not round intermediate calculations. Round the final answer to 2 decimal
places.)

Number of Times Effective

Stated Rate (APR) Compounded Rate (EAR)
n/r % Semiannually 10.9%
n/r Monthly 11.8
n/r Weekly 9.5
n/r Infinite 13.2

Find the APR, or stated rate, in each of the following cases: (Do not round intermediate calculations. Round the final answer to 2 decimal
places.)

Number of Times Effective

Stated Rate (APR) Compounded Rate (EAR)
10.62 ± 1% % Semiannually 10.9%
11.21 ± 1% Monthly 11.8
9.08 ± 1% Weekly 9.5
12.40 ± 1% Infinite 13.2

 
Explanation:

Here, we are given the EAR and need to find the APR. Using the equation for discrete compounding:

EAR = [1 + (APR / m)]m − 1

We can now solve for the APR. Doing so, we get:

APR = m[(1 + EAR)1/m – 1]

EAR = 0.1090 = [1 + (APR / 2)]2 – 1 APR = 2[(1.1090)1/2 – 1] = 0.1062, or 10.62%

EAR = 0.1180 = [1 + (APR / 12)]12 – 1 APR = 12[(1.1180)1/12 – 1] = 0.1121, or 11.21%
EAR = 0.0950 = [1 + (APR / 52)]52 – 1 APR = 52[(1.0950)1/52 – 1] = 0.0908, or 9.08%

Solving the continuous compounding EAR equation:

EAR = eAPR − 1

We get:

APR = ln(1 + EAR)

APR = ln(1 + 0.1320)
APR = 0.1240 or 12.40%

Calculator Solution:

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

Enter 10.9% 2
NOM EFF C/Y
Solve for 10.62%

Enter 11.8% 12
NOM EFF C/Y
Solve for 11.21%

Enter 9.5% 52
NOM EFF C/Y
Solve for 9.08%

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9/15/2020 Assignment Print View
 
 6. Award: 0 out of 10.00 points  

First Simple Bank pays 5.2 percent simple interest on its investment accounts. If First Complex Bank pays interest on its accounts compounded
annually, what rate should the bank set if it wants to match First Simple Bank over an investment horizon of 8 years? (Do not round intermediate
calculations. Round the final answer to 2 decimal places.)

Interest rate n/r %

First Simple Bank pays 5.2 percent simple interest on its investment accounts. If First Complex Bank pays interest on its accounts compounded
annually, what rate should the bank set if it wants to match First Simple Bank over an investment horizon of 8 years? (Do not round intermediate
calculations. Round the final answer to 2 decimal places.)

Interest rate 4.44 ± 1% %

 
Explanation:

The total interest paid by First Simple Bank is the interest rate per period times the number of periods. In other words, the interest by First Simple
Bank paid over 8 years will be:

0.052(8) = 0.416

First Complex Bank pays compound interest, so the interest paid by this bank will be the FV factor of $1, or:
(1 + r)8

Setting the two equal, we get:

(0.052)(8) = (1 + r)8 – 1

r = 1.4161/8 – 1 = 0.0444 or 4.44%

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9/15/2020 Assignment Print View
 
 7. Award: 0 out of 10.00 points  

You are planning to save for retirement over the next 20 years. To do this, you will invest $1,000 a month in a stock account and $350 a month in a
bond account. The return of the stock account is expected to be 11.0 percent, and the bond account will pay 6.0 percent. When you retire, you will
combine your money into an account with an 9 percent return. How much can you withdraw each month from your account, assuming a 15-year
withdrawal period? (Do not round intermediate calculations. Round the answer to 2 decimal places. Omit $ sign in your response.)

Withdrawal amount $ n/r per month

You are planning to save for retirement over the next 20 years. To do this, you will invest $1,000 a month in a stock account and $350 a month in a
bond account. The return of the stock account is expected to be 11.0 percent, and the bond account will pay 6.0 percent. When you retire, you will
combine your money into an account with an 9 percent return. How much can you withdraw each month from your account, assuming a 15-year
withdrawal period? (Do not round intermediate calculations. Round the answer to 2 decimal places. Omit $ sign in your response.)

Withdrawal amount $ 10,420.09 ± .1% per month

 
Explanation:

We need to find the annuity payment in retirement. Our retirement savings ends at the same time the retirement withdrawals begin, so the PV of
the retirement withdrawals will be the FV of the retirement savings. So, we find the FV of the stock account and the FV of the bond account and
add the two FVs.

Stock account: FV = $1,000[{[1 + (0.11/12) ]240 – 1} / (0.11/12)] = $865,638.04

Bond account: FV = $350[{[1 + (0.06/12) ]240 – 1} / (0.06/12)] = $161,714.31

So, the total amount saved at retirement is:

$865,638.04 + $161,714.31 = $1,027,352.35

Solving for the withdrawal amount in retirement using the PV of an annuity equation gives us:
PV = $1,027,352.35 = C[1 – {1 / [1 + (0.09/12)]240} / (0.09/12)]
C = $1,027,352.35 / 98.5934 = $10,420.09 withdrawal per month

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9/15/2020 Assignment Print View
 
 8. Award: 0 out of 10.00 points  

What is the PV of an annuity of $7,200 per year, with the first cash flow received three years from today and the last one received 25 years from
today? Use a discount rate of 8 percent. (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign
in your response.)

Present value $ n/r

What is the PV of an annuity of $7,200 per year, with the first cash flow received three years from today and the last one received 25 years from
today? Use a discount rate of 8 percent. (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign
in your response.)

Present value $ 64,018.88 ± 0.1%

 
Explanation:

The time line is:

0 1 2 3 4 5 6 7 25
picture
PV $7,200 $7,200 $7,200 $7,200 $7,200 $7,200 $7,200

We can use the PVA annuity equation to answer this question. The annuity has 23 payments, not 22 payments. Since there is a payment made
in Year 3, the annuity actually begins in Year 2. So, the value of the annuity in Year 2 is:

PVA = C({1 – [1/(1 + r)]t } / r )

PVA = $7,200({1 – [1/(1 + 0.08)]23 } / 0.08)
PVA = $74,671.62

This is the value of the annuity one period before the first payment, or Year 2. So, the value of the cash flows today is:

PV = FV/(1 + r)t
PV = $74,671.62/ (1 + 0.08)2
PV = $64,018.88

Calculator Solution:
Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

Enter 23 8% −$7,200
N I/Y PV PMT FV
Solve for $74,671.62

Enter 2 8% −$74,671.62
N I/Y PV PMT FV
Solve for $64,018.88

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 9. Award: 0 out of 10.00 points  

You receive a credit card application from Shady Banks offering an introductory rate of 1.9 percent per year, compounded monthly for the first six
months, increasing thereafter to 17 percent compounded monthly.

Assuming you transfer the $8,500 balance from your existing credit card and make no subsequent payments, how much interest will you owe at
the end of the first year? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your
response.)

Interest accrued $ n/r

You receive a credit card application from Shady Banks offering an introductory rate of 1.9 percent per year, compounded monthly for the first six
months, increasing thereafter to 17 percent compounded monthly.

Assuming you transfer the $8,500 balance from your existing credit card and make no subsequent payments, how much interest will you owe at
the end of the first year? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your
response.)

Interest accrued $ 836.79 ± 1%

 
Explanation:

The time line is:

0 12
picture
$8,500 FV

Here, we need to find the FV of a lump sum, with a changing interest rate. We must do this problem in two parts. After the first six months, the
balance will be:

FV = $8,500 [1 + (0.019/12)]6 = $8,581.07

This is the balance in six months. The FV in another six months will be:

FV = $8,581.07 [1 + (0.17/12)]6 = $9,336.79

The problem asks for the interest accrued, so, to find the interest, we subtract the beginning balance from the FV. The interest accrued is:

Interest = $9,336.79 – 8,500 = $836.79

Calculator Solution:
Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

Enter 6 1.90% / 12 −$8,500

N I/Y PV PMT FV
Solve for $8,581.07

Enter 6 17% / 12 −$8,581.07

N I/Y PV PMT FV
Solve for $9,336.79

$9,336.79 – 8,500 = $836.79

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9/15/2020 Assignment Print View
 
 10. Award: 0 out of 10.00 points  

You’re prepared to make monthly payments of $430, beginning at the end of this month, into an account that pays 10.8 percent interest
compounded monthly.

How many payments will you have made when your account balance reaches $43,000? (Do not round intermediate calculations. Round the
final answer to 2 decimal places.)

Number of payments n/r

You’re prepared to make monthly payments of $430, beginning at the end of this month, into an account that pays 10.8 percent interest
compounded monthly.

How many payments will you have made when your account balance reaches $43,000? (Do not round intermediate calculations. Round the
final answer to 2 decimal places.)

Number of payments 71.64 ± 1%

 
Explanation:

The time line is:

0 1 ?
picture
−$43,000
$430 $430 $430 $430 $430 $430 $430 $430 $430

Here, we are given the FVA, the interest rate, and the amount of the annuity. We need to solve for the number of payments. Using the FVA
equation:

FVA = $43,000 = $430[{[1 + (0.108/12)]t – 1 } / (0.108/12)]

Solving for t, we get:

1.00900t = 1 + [($43,000) (0.108/12) / ($430)]

t = ln 1.90000 / ln 1.00900 = 71.64 payments

t = ln 1.90000 / ln 1.00900 = 71.64 payments

Calculator Solution:
Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

Enter 430.0% / 12 −$430 $43,000

N I/Y PV PMT FV
Solve for 71.64

t = ln 1.90000 / ln 1.00900 = 71.64 payments

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9/15/2020 Assignment Print View
 
 11. Award: 0 out of 10.00 points
 

You want to borrow $62,000 from the bank to buy a new sailboat. You can afford to make monthly payments of $1,170, but no more.

Assuming monthly compounding, what is the highest APR you can afford on a 60-month loan? (Do not round intermediate calculations.
Round the final answer to 2 decimal places.)

Interest rate n/r %

You want to borrow $62,000 from the bank to buy a new sailboat. You can afford to make monthly payments of $1,170, but no more.

Assuming monthly compounding, what is the highest APR you can afford on a 60-month loan? (Do not round intermediate calculations.
Round the final answer to 2 decimal places.)

Interest rate 5.00 ± 1% %

 
Explanation:

The time line is:

0 1 60

−$62,000 $1,170 $1,170 $1,170 $1,170 $1,170 $1,170 $1,170 $1,170 $1,170 $1,170

Here, we are given the PVA, number of periods, and the amount of the annuity. We need to solve for the interest rate. Using the PVA equation:

PVA = $62,000 = $1,170[{1 – [1 / (1 + r)]60}/ r]

To find the interest rate, we need to solve this equation on a financial calculator, using a spreadsheet, or by trial and error. If you use trial and
error, remember that increasing the interest rate lowers the PVA, and decreasing the interest rate increases the PVA. Using a spreadsheet, we
find:

r = 0.417%

The APR is the periodic interest rate times the number of periods in the year, so:
APR = 12(0.417%) = 5.00%

Calculator Solution:
Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

Enter 60 $62,000 −$62,000

N I/Y PV PMT FV
Solve for 0.417%

0.417% × 12 = 5.00%

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 12. Award: 0 out of 10.00 points
 

You need a 35-year, fixed-rate mortgage to buy a new home for $245,000. Your bank will lend you the money at a 5.4 percent APR for this 420-
month loan. However, you can only afford monthly payments of $500, so you offer to pay off any remaining loan balance at the end of the loan in
the form of a single balloon payment.

How large will this balloon payment have to be for you to keep your monthly payments at $500? (Do not round intermediate calculations.
Round the final answer to 2 decimal places. Omit $ sign in your response.)

Balloon payment $ n/r

You need a 35-year, fixed-rate mortgage to buy a new home for $245,000. Your bank will lend you the money at a 5.4 percent APR for this 420-
month loan. However, you can only afford monthly payments of $500, so you offer to pay off any remaining loan balance at the end of the loan in
the form of a single balloon payment.

How large will this balloon payment have to be for you to keep your monthly payments at $500? (Do not round intermediate calculations.
Round the final answer to 2 decimal places. Omit $ sign in your response.)

Balloon payment $ 993,621.43 ± 0.1%

 
Explanation:

The time line is:

0 1 420

PV $500 $500 $500 $500 $500 $500 $500 $500 $500

The amount of principal paid on the loan is the PV of the monthly payments you make. So, the present value of the $500 monthly payments is:

PVA = $500[(1 – {1 / [1 + (0.054/12)]}420) / (0.054/12)] = $94,254.04

The monthly payments of $500 will amount to a principal payment of $94,254.04. The amount of principal you will still owe is:
$245,000 – 94,254.04 = $150,745.96

0 1 420

150,745.96 FV

This remaining principal amount will increase at the interest rate on the loan until the end of the loan period. So the balloon payment in 35 years,
which is the FV of the remaining principal will be:

Balloon payment = $150,745.96[1 + (0.054/12)]420 = $993,621.43

Calculator Solution:

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

Enter 420 5.40% / 12 −$500

N I/Y PV PMT FV
Solve for $94,254.04

$245,000 − 94,254.04 = $150,745.96

Enter 420 5.40% / 12 −$150,745.96

N I/Y PV PMT FV
Solve for $500

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9/15/2020 Assignment Print View
 
 13. Award: 0 out of 10.00 points
 

A local finance company quotes a 17 percent interest rate on one-year loans. So, if you borrow $28,000, the interest for the year will be $4,760.
Because you must repay a total of $32,760 in one year, the finance company requires you to pay $32,760 divided by 12, or $2,730.00, per month
over the next 12 months. Is this a 17 percent loan? (Do not round intermediate calculations. Round the final answer to 2 decimal places.)

What rate would legally have to be quoted?

Annual percentage rate n/r %

What is the EAR?

Effective annual rate n/r %

A local finance company quotes a 17 percent interest rate on one-year loans. So, if you borrow $28,000, the interest for the year will be $4,760.
Because you must repay a total of $32,760 in one year, the finance company requires you to pay $32,760 divided by 12, or $2,730.00, per month
over the next 12 months. Is this a 17 percent loan? (Do not round intermediate calculations. Round the final answer to 2 decimal places.)

What rate would legally have to be quoted?

Annual percentage rate 30.03 ± 0.05 %

What is the EAR?

Effective annual rate 34.52 ± 0.05 %

 
Explanation:

The time line is:

0 1 12

−$28,000 $2,730.00 $2,730.00 $2,730.00 $2,730.00 $2,730.00 $2,730.00 $2,730.00 $2,730.00 $2,730.00

To find the APR and EAR, we need to use the actual cash flows of the loan. In other words, the interest rate quoted in the problem is only
relevant to determine the total interest under the terms given. The PVA equation is:

PVA = $28,000 = $2,730.00{(1 – [1 / (1 + r)]12 ) / r }

Again, we cannot solve this equation for r, so we need to solve this equation on a financial calculator, using a spreadsheet, or by trial and error.
Using a spreadsheet, we find:

r = 2.502% per month

So the APR is:

APR = 12(2.502%) = 30.03%

And the EAR is:

EAR = (1.02502)12 – 1 = 34.52%

Calculator Solution:

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

Enter 12 $28,000 -$2,730.00

N I/Y PV PMT FV
Solve for 2.502%

APR = 2.502% × 12 = 30.03%

Enter 30.03% 12
NOM EFF C/Y
Solve for 34.52%

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Suppose you are going to receive $19,700 per year for four years. The appropriate interest rate is 6.7 percent. (Do not round intermediate
calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)

a-1. What is the PV of the payments if they are in the form of an ordinary annuity?

Present value $ n/r

a-2. What is the PV if the payments are an annuity due?

Present value $ n/r

b-1. Suppose you plan to invest the payments for four years. What is the future value if the payments are an ordinary annuity?

Future value $ n/r

b-2. Suppose you plan to invest the payments for four years. What if the payments are an annuity due?

Future value $ n/r

Suppose you are going to receive $19,700 per year for four years. The appropriate interest rate is 6.7 percent. (Do not round intermediate
calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)

a-1. What is the PV of the payments if they are in the form of an ordinary annuity?

Present value $ 67,182.48 ± 0.1%

a-2. What is the PV if the payments are an annuity due?

Present value $ 71,683.71 ± 0.1%

b-1. Suppose you plan to invest the payments for four years. What is the future value if the payments are an ordinary annuity?

Future value $ 87,079.06 ± 0.1%

b-2. Suppose you plan to invest the payments for four years. What if the payments are an annuity due?

Future value $ 92,913.36 ± 0.1%

 
Explanation:

a.
The time line for the ordinary annuity is:

0 1 2 3 4 5

PV $19,700 $19,700 $19,700 $19,700 $19,700

If the payments are in the form of an ordinary annuity, the present value will be:

PVA = C({1 – [1/(1 + r)t]} / r )

PVA = $19,700{1 – [1 / (1 + 0.067)]4} / 0.067]
PVA = $67,182.48

The time line for the annuity due is:

0 1 2 3 4 5

PV
$19,700 $19,700 $19,700 $19,700 $19,700 $19,700

If the payments are an annuity due, the present value will be:

PVAdue = (1 + r)PVA
PVAdue = (1 + 0.067)$67,182.48
PVAdue = $71,683.71

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b.
The time line for the ordinary annuity is:

0 1 2 3 4 5

FV
$19,700 $19,700 $19,700 $19,700 $19,700

We can find the future value of the ordinary annuity as:

FVA = C{[(1 + r)t – 1] / r}

FVA = $19,700{[(1 + 0.067)4 – 1] / 0.067}
FVA = $87,079.06

0 1 2 3 4 5

$19,700 $19,700 $19,700 $19,700 $19,700 FV

If the payments are an annuity due, the future value will be:

FVAdue = (1 + r)FVA
FVAdue = (1 + 0.067)$87,079.06
FVAdue = $92,913.36

Calculator Solution:

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

a.
Enter 4 6.7% −$19,700
N I/Y PV PMT FV
Solve for $67,182.48

2nd BGN 2nd SET

Enter 4 6.7% −$19,700
N I/Y PV PMT FV
Solve for $71,683.71

b.
Enter 4 6.7% −$19,700
N I/Y PV PMT FV
Solve for $87,079.06

2nd BGN 2nd SET

Enter 4 6.7% −$19,700
N I/Y PV PMT FV
Solve for $19,700.00

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A financial planning service offers a university savings program. The plan calls for you to make six annual payments of $14,800 each, with the
first payment occurring today, your child’s 12th birthday. Beginning on your child’s 18th birthday, the plan will provide $35,000 per year for four
years.

What return is this investment offering? (Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Return n/r %

A financial planning service offers a university savings program. The plan calls for you to make six annual payments of $14,800 each, with the
first payment occurring today, your child’s 12th birthday. Beginning on your child’s 18th birthday, the plan will provide $35,000 per year for four
years.

What return is this investment offering? (Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Return 9.39 ± 1% %

 
Explanation:

Here, we need to find the interest rate that makes the PVA, the college costs, equal to the FVA, the savings. The PV of the college costs is:

PVA = $35,000[{1 – [1 / (1 + r)]4 } / r ]

And the FV of the savings is:

FVA = $14,800{[(1 + r)6 – 1 ] / r }

Setting these two equations equal to each other, we get:

$35,000[{1 – [1 / (1 + r)]4 } / r ] = $14,800{[ (1 + r)6 – 1 ] / r }

Reducing the equation gives us:

14.8(1 + r)10 – 49.8(1 + r)4 + 35 = 0

Now, we need to find the root of this equation. We can solve using trial and error, a root-solving calculator routine, or a spreadsheet. Using a
spreadsheet, we find:
r = 9.39%

Calculator Solution:

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

CF0 $14,800
C01 $14,800
F01 5
C02 $35,000
F02 4
IRR CPT
9.39%

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