Altaf Ahmad 314472 BESE10B Quiz3

Question #1: If $10,000 were invested in a mutual fund that offered an annual interest rate of
7% compounded semi-annually, how much would be in the account after 3 years?
Solution:
nt
Formula: A = P(1 + r/n)
Where:
A = the future amount
P = the principal amount (initial deposit)
r = the annual interest rate (as a decimal)
n = the number of times the interest is compounded per year
t = the number of years
In this case, the principal amount (P) is $10,000, the annual interest rate (r) is 7% (or 0.07 as
a decimal), the interest is compounded semi-annually (n = 2), and the number of years (t) is 3.
Using these values into the formula:
A = 10,000(1 + 0.07/2)(2*3)
A = 10,000(1 + 0.035)6
A = 10,000(1.035)6
A = $12,855.02
Therefore, after 3 years, the amount in the account would be approximately $12,855.02.
Question #2: If you wished to have $1,000,000 in a retirement account at the end of ten years
and the account offers an 8% annual interest rate compounded annually, how much should
you invest in the retirement account now?
Solution:
It can be solved by using Present Value Formula:
P = A / (1 + r)^t
Here:
P = the present value (initial investment)
A = the desired future amount
r = the annual interest rate (as a decimal)
t = the number of years
In this case, the desired future amount (A) is $1,000,000, the annual interest rate (r) is 8% (or
0.08 as a decimal), and the number of years (t) is 10. Plugging these values into the formula:
P = 1,000,000 / (1 + 0.08)10
P = 1,000,000 / (1.08)10
P ≈ $463,193.82
Therefore, you should invest approximately $463,193.82 in the retirement account now to
have $1,000,000 at the end of ten years.
Question # 3: If a person deposits $2,000 in a retirement account at the beginning of each

year for six years and the account pays 6% interest, compounded annually, how much will
they have in their account at the end of six years, immediately following their seventh
deposit?
Solution:
It can be solved by using future value of an ordinary annuity formula:
FV = P * ((1 + r)^n - 1) / r
FV = the future value of the annuity
P = the periodic payment or deposit amount
r = the interest rate per period (as a decimal)
n = the number of periods

In this case, the deposit amount (P) is $2,000, the annual interest rate (r) is 6% (or 0.06 as a
decimal), and the number of periods (n) is 6 since the person makes deposits at the beginning
of each year for six years.
Plugging these values into the formula:
FV = 2,000 * ((1 + 0.06)^6 - 1) / 0.06
FV = 2,000 * (1.06^6 - 1) / 0.06
FV = 2,000 * (1.41851092 - 1) / 0.06
FV = 2,000 * 0.41851092 / 0.06
FV ≈ $14,280.18
Therefore, at the end of six years, immediately following the person's seventh deposit, they
will have approximately $14,280.18 in their retirement account.
Question # 4: A person wants to have $50,000 after 3 years. How much should they deposit
at the beginning of each year if the investment offers a 6% interest rate, compounded
annually?
Solution:
Using formula for periodic payment of an ordinary annuity:

P = A * r / ((1 + r)^n - 1)
P = the periodic payment or deposit amount
A = the desired future amount
In this case, the desired future amount (A) is $50,000, the annual interest rate (r) is 6% (or
0.06 as a decimal), and the number of periods (n) is 3 since the person wants to achieve the
desired amount after 3 years.
P = 50,000 * 0.06 / ((1 + 0.06)^3 - 1)
P = 50,000 * 0.06 / (1.06^3 - 1)
P = 50,000 * 0.06 / (1.191016 - 1)
P = 50,000 * 0.06 / 0.191016
P ≈ $9,355.18
Therefore, the person should deposit approximately $9,355.18 at the beginning of each year
to have $50,000 after 3 years.
Question # 5: A woman deposits $500,000 in a retirement account that earns 6% interest,

compounded annually. She wants to withdraw all the money in 10 years. How much should
she withdraw each year?
Solution:
Using the formula for the future value of a lump sum:
FV = P * (1 + r)^n
Where:
FV = the future value (initial deposit plus accumulated interest)
P = the initial deposit or account balance
In this case, the initial deposit (P) is $500,000, the annual interest rate (r) is 6% (or 0.06 as a
decimal), and the number of periods (n) is 10 years.

FV = 500,000 * (1 + 0.06)^10
FV = 500,000 * (1.06)^10
FV ≈ $895,425.69
Therefore, the future value of the account balance after 10 years is approximately
$895,425.69. To determine the annual withdrawal amount evenly over the 10-year period, the
total future value should be divided by the number of years:
Annual Withdrawal Amount = FV / n
Annual Withdrawal Amount ≈ 895,425.69 / 10
Annual Withdrawal Amount ≈ $89,542.57
Therefore, the woman should withdraw approximately $89,542.57 each year for 10 years to
deplete her account balance of $500,000.
Question # 6: A woman wishes to withdraw $50,000 each year for six years from her
investment account. If the account earns 7% interest, compounded annually, how much
should she initially deposit?
Solution:
To solve this, we can use the present value of an ordinary annuity formula:
P = A * ((1 - (1 + r)^(-n)) / r)
Where:
P = the present value or initial deposit
A = the annual withdrawal amount
In this case, the annual withdrawal amount (A) is $50,000, the annual interest rate (r) is 7%
(or 0.07 as a decimal), and the number of periods (n) is 6 years.
P = 50,000 * ((1 - (1 + 0.07)^(-6)) / 0.07)
P = 50,000 * ((1 - (1.07)^(-6)) / 0.07)
P = 50,000 * ((1 - 0.5084276181) / 0.07)
P = 50,000 * (0.4915723819 / 0.07)
P ≈ $352,249.12
Therefore, the woman should initially deposit approximately $352,249.12 in her investment
account to be able to withdraw $50,000 each year for six years, assuming a 7% annual
interest rate compounded annually.

Altaf Ahmad 314472 BESE10B Quiz3

Uploaded by

Copyright:

Available Formats

Altaf Ahmad 314472 BESE10B Quiz3

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Altaf Ahmad 314472 BESE10B Quiz3

Uploaded by

Copyright:

Available Formats

Question #1: If $10,000 were invested in a mutual fund that offered an annual interest rate of

7% compounded semi-annually, how much would be in the account after 3 years?

A = the future amount

P = the principal amount (initial deposit)

r = the annual interest rate (as a decimal)

n = the number of times the interest is compounded per year

t = the number of years

It can be solved by using Present Value Formula:

P = the present value (initial investment)

A = the desired future amount

r = the annual interest rate (as a decimal)

t = the number of years

Question # 3: If a person deposits $2,000 in a retirement account at the beginning of each

It can be solved by using future value of an ordinary annuity formula:

FV = the future value of the annuity

P = the periodic payment or deposit amount

r = the interest rate per period (as a decimal)

n = the number of periods

Plugging these values into the formula:

FV = 2,000 * ((1 + 0.06)^6 - 1) / 0.06

FV = 2,000 * (1.06^6 - 1) / 0.06

FV = 2,000 * (1.41851092 - 1) / 0.06

FV = 2,000 * 0.41851092 / 0.06

Using formula for periodic payment of an ordinary annuity:

P = the periodic payment or deposit amount

A = the desired future amount

r = the interest rate per period (as a decimal)

n = the number of periods

P = 50,000 * 0.06 / ((1 + 0.06)^3 - 1)

P = 50,000 * 0.06 / (1.06^3 - 1)

P = 50,000 * 0.06 / (1.191016 - 1)

P = 50,000 * 0.06 / 0.191016

Question # 5: A woman deposits $500,000 in a retirement account that earns 6% interest,

Using the formula for the future value of a lump sum:

FV = the future value (initial deposit plus accumulated interest)

P = the initial deposit or account balance

r = the interest rate per period (as a decimal)

n = the number of periods

Plugging these values into the formula:

Annual Withdrawal Amount = FV / n

Annual Withdrawal Amount ≈ 895,425.69 / 10

Annual Withdrawal Amount ≈ $89,542.57

P = the present value or initial deposit

A = the annual withdrawal amount

r = the interest rate per period (as a decimal)

n = the number of periods

P = 50,000 * ((1 - (1 + 0.07)^(-6)) / 0.07)

P = 50,000 * ((1 - (1.07)^(-6)) / 0.07)

P = 50,000 * ((1 - 0.5084276181) / 0.07)

P = 50,000 * (0.4915723819 / 0.07)

You might also like