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Exercises in compound interest, no income taxes. To be sure that you understand how to use the tables in Appendix A at the end of this book, solve the following exercises. Ignore income tax considerations. The correct answers, rounded to the nearest dollar, appear on page 855.
1. You have just won $50,000. How much money will you accumulate at the end of 5 years if you invest it at 6% compounded annually? At 12%?
2. Twelve years from now, the unpaid principal of the mortgage on your house will be $249,600. How much do you need to invest today at 6% interest compounded annually to accumulate the $249,600 in 12 years?
3. If the unpaid mortgage on your house in 12 years will be $249,600, how much money do you need to invest at the end of each year at 6% to accumulate exactly this amount at the end of the 12th year?
4. You plan to save $4,800 of your earnings at the end of each year for the next 8 years. How much money will you accumulate at the end of the 8th year if you invest your savings compounded at 4% per year?
5. You have just turned 65 and an endowment insurance policy has paid you a lump sum of $400,000. If you invest the sum at 6%, how much money can you withdraw from your account in equal amounts at the end of each year so that at the end of 7 years (age 72), there will be nothing left?
6. You have estimated that for the first 6 years after you retire you will need a cash inflow of $48,000 at the end of each year. How much money do you need to invest at 4% at your retirement age to obtain this annual cash inflow? At 6%?
7. The following table shows two schedules of prospective operating cash inflows, each of which requires the same net initial investment of $18,000 now:
The required rate of return is 6% compounded annually. All cash inflows occur at the end of each year. In terms of net present value, which plan is more desirable? Show your computations.
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