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Class Example and Notes Taking - 1020

The document provides 11 examples demonstrating calculations for simple and compound interest over different periods of time. Various scenarios are presented such as investing a lump sum that earns interest annually, biannually, or with regular additional investments. Formulas are shown for calculating future and present values based on the principal, interest rate, and number of periods.

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Rasha Yatmeen
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78 views3 pages

Class Example and Notes Taking - 1020

The document provides 11 examples demonstrating calculations for simple and compound interest over different periods of time. Various scenarios are presented such as investing a lump sum that earns interest annually, biannually, or with regular additional investments. Formulas are shown for calculating future and present values based on the principal, interest rate, and number of periods.

Uploaded by

Rasha Yatmeen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Example 1: Assume you invest $1,000 at 6% simple interest for 3 years.

How much interest would you


earn for 3 years?

1000 x 6% x 3 = $180

Example 2: Barstow Electric Inc. borrows $10,000 for 3 months at a simple interest rate of 8% per year,
the interest is computed as follows.

10000 x 8% x 3/12 = $200

Example 3: Tom Company deposits $10,000 in the Last National Bank, where it will earn simple interest
of 9% per year.

It deposits another $10,000 in the First State Bank, where it will earn compound interest of 9% per year
compounded annually. In both cases, Tom company will not withdraw any interest until 3 years from the
date of deposit.

S. I = 10000 x 9% x 3

= 2700

Compound Interest

10000 x 9% = 900.00 10900

10900 x 9% = 981.00 11881

11881 x 9% = 1069.29 12,950.29

Example 4: Assume you deposit $1,000 in a bank that earns 6% interest compounded annually for 3
years. What is the balance in your account at the end of three years?

1000 x 1.19102 = 11,9102

Example 5: Assume that Commonwealth Edison Company deposited $250 million in an escrow account
with Northern Trust Company at the beginning of 2017 as a commitment toward a power plant to be
completed December 31, 2020. How much will the company have on deposit at the end of 4 years if
interest is 10%, compounded semiannually?

N=4x2=8

I = 10% / 2 = 5%

250,000,000 x 1.47746 = $369365000


Example 6: Assume you plan to buy a new car in 5 years and you think it will cost $20,000 at that time.

PV = 20,000 / (1+8%)^5 = 13611.6

PV = 20,000 / 0.68058 =13611.6

What amount must you invest today in order to accumulate $20,000 in 5 years, if you can earn 8%
interest compounded annually?

$13611.6

Example 7: Assume that your rich uncle decides to give you $2,000 for a trip to Europe when you
graduate from college 3 years from now. He proposes to finance the trip by investing a sum of money
now at 8% compound interest that will provide you with $2,000 upon your graduation. The only
conditions are that you graduate and that you tell him how much to invest now.

PV = 2000/(1+8%)^3 = 1587.66

PV = 2000 / 0.79383 = 1587.66

Example 8 Computation of the Number of Periods

The Village of Somonauk wants to accumulate $70,000 for the construction of a veterans monument in
the town square. At the beginning of the current year, the Village deposited $47,811 in a memorial fund
that earns 10% interest compounded annually. How many years will it take to accumulate $70,000 in the
memorial fund?

PV = FV (PVFn .10%)

47811 = 70,000 (PVFn .10%)

PVFn = 47811/70000

PVFn = 0.68301

N = 4 (From the table)

Example 9: Advanced Design, Inc. needs $1,070,584 for basic research 5 years from now. The company
currently has $800,000 to invest for that purpose. At what rate of interest must it invest the $800,000 to
fund basic research projects of $1,070,584, 5 years from now?

1070584 = 800,000 x (1+ i)^5

I = 0.06 = 6%

(1+i)^5 = 1070584/800,000 = 1.33823

I = 6% n= 5
Example 10. If there is one investment of $10,000 at the end of each year, and annual interest rate is
2%, what will be the fund balance in 4 years?

FV = 10,000 x (1+2%)^3 = 10612  1

10,000 x (1+2%)^2 = 10404  2

10,000 x (1+2%)^1 = 10200  3

10,000  4

Total = 41216

Example 11. Hightown Electronics deposits $75,000 at the end of each 6-month period for the next 3
years, to accumulate enough money to meet debts that mature in 3 years. What is the future value that
the company will have on deposit at the end of 3 years if the annual interest rate is 10%?

N = 3x 2 = 6

I = 10%/ 2 = 5%

75,000 x 6.80191

= 510143.25

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