Module 6 Homework Answer Key

Ross Book
Module 6
CH 4 Q 1, 2, 3, 4, 5, 7

1. The time line for the cash flows is:

0 10

$8,100 FV

The simple interest per year is:

$8,100 × .06 = $486

So, after 10 years, you will have:

$486 × 10 = $4,860 in interest.

The total balance will be $8,100 + 4,860 = $12,960

With compound interest, we use the future value formula:

FV = PV(1 +r)t
FV = $8,100(1.06)10
FV = $14,505.87

The difference is:

$14,505.87 – 12,960 = $1,545.87

2. To find the FV of a lump sum, we use:

FV = PV(1 + r)t

0 7

$3,150 FV

FV = $3,150(1.13)7 = $7,410.71

0 16

$8,453 FV

1
 FV = $8,453(1.07)16 = $24,954.64

0 19

$89,305 FV

FV = $89,305(1.09)19 = $459,176.06

0 26

$227,382 FV

FV = $227,382(1.05)26 = $808,495.97

3. To find the PV of a lump sum, we use:

PV = FV / (1 + r)t

0 15

PV $17,328

PV = $17,328 / (1.07)15 = $6,280.46

0 8

PV $41,517

PV = $41,517 / (1.11)8 = $18,015.33

0 13

PV $790,382

PV = $790,382 / (1.10)13 = $228,945.51

0 25

PV $647,816

PV = $647,816 / (1.13)25 = $30,513.40

4. To answer this question, 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 r, we get:

r = (FV / PV)1 / t – 1

2
 0 11

–$715 $1,381

FV = $1,381 = $715(1 + r)11

r = ($1,381 / $715)1/11 – 1
r = .0617, or 6.17%

0 8

–$905 $1,718

FV = $1,718 = $905(1 + r)8

r = ($1,718 / $905)1/8 – 1
r = .0834, or 8.34%

0 23

–$15,000 $141,832

FV = $141,832 = $15,000(1 + r)23

r = ($141,832 / $15,000)1/23 – 1
r = .1026, or 10.26%

0 16

–$70,300 $312,815

FV = $312,815 = $70,300(1 + r)16

r = ($312,815 / $70,300)1/16 – 1
r = .0978, or 9.78%

5. To answer this question, 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 t

–$195 $873

FV = $873 = $195 (1.09)t

t = ln($873 / $195) / ln 1.09
t = 17.39 years

3
 0 t

–$2,105 $3,500

FV = $3,500 = $2,105(1.07)t
t = ln($3,500 / $2,105) / ln 1.07
t = 7.51 years

0 t

–$47,800 $326,500

FV = $326,500 = $47,800(1.12)t
t = ln($326,500 / $47,800) / ln 1.12
t = 16.95 years

0 t

–$38,650 $213,380

FV = $213,380 = $38,650(1.19)t
t = ln($213,380 / $38,650) / ln 1.19
t = 9.82 years

7. To find the length of time for money to double, triple, etc., the present value and future value are
irrelevant as long as the future value is twice the present value for doubling, three times as large for
tripling, etc. To answer this question, 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)

The length of time to double your money is:

0 t

–$1 $2

FV = $2 = $1(1.047)t
t = ln 2 / ln 1.047
t = 15.09 years

The length of time to quadruple your money is:

0 t

4
 –$1 $4

FV = $4 = $1(1.047)t
t = ln 4 / ln 1.047
t = 30.18 years

Notice that the length of time to quadruple your money is twice as long as the time needed to double
your money. This is an important concept of time value of money.

Calculator Solutions

1.
Enter 10 6% $8,100
N I/Y PV PMT FV
Solve for $14,505.87

$14,505.87 – [$8,100 + 10($486)] = $1,545.87

2.
Enter 7 13% $3,150
N I/Y PV PMT FV
Solve for $7,410.71

Enter 16 7% $8,453
N I/Y PV PMT FV
Solve for $24,954.64

Enter 19 9% $89,305
N I/Y PV PMT FV
Solve for $459,176.06

Enter 26 5% $227,382
N I/Y PV PMT FV
Solve for $808,495.97

3.
Enter 15 7% $17,328
N I/Y PV PMT FV
Solve for –$6,280.46

Enter 8 11% $41,517

N I/Y PV PMT FV
Solve for –$18,015.33

5
Enter 13 10% $790,382
N I/Y PV PMT FV
Solve for –$228,945.51

Enter 25 13% $647,816

N I/Y PV PMT FV
Solve for –$30,513.40

4.
Enter 11 $715 $1,381
N I/Y PV PMT FV
Solve for 6.17%

Enter 8 $905 $1,718

N I/Y PV PMT FV
Solve for 8.34%

Enter 23 $15,000 $141,832

N I/Y PV PMT FV
Solve for 10.26%

Enter 16 $70,300 $312,815

N I/Y PV PMT FV
Solve for 9.78%

5.
Enter 9% $195 $873
N I/Y PV PMT FV
Solve for 17.39

Enter 7% $2,105 $3,500

N I/Y PV PMT FV
Solve for 7.51

Enter 12% $47,800 $326,500

N I/Y PV PMT FV
Solve for 16.95

Enter 19% $38,650 $213,380

N I/Y PV PMT FV
Solve for 9.82

6
7.
Enter 4.7% $1 $2
N I/Y PV PMT FV
Solve for 15.09

Enter 4.7% $1 $4

N I/Y PV PMT FV
Solve for 30.18