Consider the following independent situations. Click here to view factor tables

Question

Consider the following independent situations.

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1. Alan Finley wishes to become a millionaire. His money market fund has a balance of $183,757 and has a guaranteed interest rate of 8%. How many years must Alan leave that balance in the fund in order to get his desired $925,000? (Round answer to 0 decimal places, e.g. 45.)

2. Assume that Carla Williams desires to accumulate $925,000 in 12 years using her money market fund balance of $264,403. At what interest rate must Carla’s investment compound annually? (Round answer to 0 decimal places, e.g. 5%.)

Explanation / Answer

We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.

1.

925000=183757(1.08)^n

(925000/183757)=1.08^n

Taking log on both sides;

log (925000/183757)=n*log 1.08

Hence n=log(925000/183757)/log 1.08

=21 years

2.

925000=264403(1+r/100)^12

(925000/264403)^(1/12)=1+r/100

1+r/100=1.11

Hence r=(1.11-1)*100

=11%.

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