Present and future value tables of $1 at 9% are presented below. Ajax Company pu

Question

Present and future value tables of $1 at 9% are presented below.

   
Ajax Company purchased a two-year certificate of deposit for its building fund in the amount of $180,000. How much should the certificate of deposit be worth at the end of two years if interest is compounded at an annual rate of 9%?

$316,640.

$213,858.

$315,381.

$212,599.

PV of $1 FV of $1 PVA of $1 FVAD of $1 FVA of $1 1 0.91743 1.09000 0.91743 1.0900 1.0000 2 0.84168 1.18810 1.75911 2.2781 2.0900 3 0.77218 1.29503 2.53129 3.5731 3.2781 4 0.70843 1.41158 3.23972 4.9847 4.5731 5 0.64993 1.53862 3.88965 6.5233 5.9847 6 0.59627 1.67710 4.48592 8.2004 7.5233

Explanation / Answer

In the question it is given that the interest is compunded at an annual rate of 9%, so to calculate the worth of the COD at the end of two years, we have to take the FV of $1 at 9% at the end of two years which is given in the question as 1.18810

So, the worth of $180000 at the end of 2 years = $180000*1.18810

= $213858

Alternatively for better understandind,

Compounded Annually means we will get interest on the interest earned in the 1st year

So

I Year

Basic Amount = 180000

Interest = 180000*9% = 16200

Total Amount = 196200

II Year

Amount = 196200

Interest = 196200* 9% = 17658

Total = 196200+17658 =213858

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