Problem 3-5 Tom Watson promises to deposit a sum of S100,000 for his granddaught

Question

Problem 3-5 Tom Watson promises to deposit a sum of S100,000 for his granddaughter's college education 18 years from now. If he invests $20,000 today, what should be return on investment he should get to be able keep up the promise? Assume interest is compounded yearly Problem 3-6 Jane and Joe made two investments of $25,000 and $40,000 with different investors that yieldeda combined rate of retum of 10% compounded for 6 years. If the rate return on the first investment was 9%, what is the rate of return the couple obtained on the second investment? Problem 3-7 A sum of $500,000 will be invested by a firm two years from now. If money is worth 12%, what will be the worth of this investment 10 years from now?

Explanation / Answer

3-5

P = $20,000

A = $100,000

t = 18 years

Let the rate of interest = r %

Here, we use formula;

A = P [ 1 + r ]t

Put values, we get

100,000 =20000[1+r]18

5 1/18 = 1+r

1.0935 = 1+r

r = 9.35% per annum.

3-6

Investment 1 (I1) = $25000

Investment 2 (I2) = $40000

Weight of I1 = w1 = 25000/(25000+40000) = 38.46%

Weight of I2 = w2 = 40000/(25000+40000) = 61.54%

Combined return = Weight of I1 *R1 + Weight of I2*R2

10% = 38.46% * 9% + 61.54% * R2

R2 = (10% - 38.46% * 9%)/61.54%

R2 = 10.625%

So, return on second investment is 10.625%

3-7

FV (After 10 years from now) = ?
PV (After 2 years from now)= $500,000
r= 12%
n = 8 (10-2) years

formula
FV = PV x (1+r)n
FV = $500,000 x (1+12%)8
FV = $500,000 x 2.476 = $1,238,000
$1,238,000 will be the worth of this investment, 10 years from now.

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