Problem 9-32 Yield [LO4] Franklin Templeton has just invested $9,260 for his son

Question

Problem 9-32 Yield [LO4] Franklin Templeton has just invested $9,260 for his son (age one). This money will be used for his son's education 18 years from now. Hecalculates that he will need $71,231 by the time the boy goes to school What rate of return will Mr. Templeton need in order to achieve this goal? Use Appendix B for an approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places.) All input values are shown in yellow. Only these values need changed to review algo versions. Answers are displayed in red. Connect tolerances are listed below the solution. Assumptions and other problem notes are displayed at the very bottom Input variables: nvestment Number of years Future value $9,260 18 $71,231 Solution and Explanation: Interest rate PVIF factor

Explanation / Answer

Here PV = 9260, n = 18 and FV = 71,231

Let the rate of return be “r”

Thus 71231 = 9260*(1+r)^18

Or 71231/9260 = (1+r)^18

Or (71231/9260)^(1/18) = 1+r

Or 1.120019 = 1+r

Or r = 12.0019%

PVIF factor = PV/FV

= 9260/71231= 0.1300

Thus interest rate = 12.00% and PVIF = 0.13

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