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solve without excel It is known that an investment of $400 will increase to $320

ID: 2820369 • Letter: S

Question

solve without excel It is known that an investment of $400 will increase to $3200 at the end of 20 years. Find the sum of present values of three payments of $20,000 each which will occur at the end of 20, 40, and 60 years. Q2. (a) (6 marks) (b) Simon wishes to accumulate $50,000 in an investment fund at the end of 20 years. If he deposits $1000 in the fund at the end of each of the first 10 years and $1000+X in the fund at the end of each of the second 10 years, find X if (6 marks) the fund earns 7% effective interest rate.

Explanation / Answer

PV = FV/(1+r)^n

PV - Present value

FV - Future value

r - Interest rate

n - no. of periods

400 = 3200/(1+r)^20

r = 10.9569%

Sum of present values = 20000/(1+10.9569%)^20 + 20000/(1+10.9569%)^40 + 20000/(1+10.9569%)^60

= $2851.59

b.

Value of first $1000,

FV of annuity = P*[((1+r)^n - 1)/r]
P - Periodic payment
r - rate per period
n - number of periods
FV of annuity at the end of 10 years = 1000*(((1+0.07)^10 - 1)/0.07)

= $13816.44796

Value at the end of 20 years = 13816.45*(1+0.07)^10 = $27179.04436

Value required = 50000 - 27179.04436 = $22820.95564

This amount should be accumulated in the second 10 years,

Using future value of annuity formula

22820.95564 = (1000+x)*(((1+0.07)^10 - 1)/0.07)

22820.95564 = (1000+x)*13.81644796

x = $651.72