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6 Suppose you have the option to receive $8,000 at the end of five years or
Dollars today. Currently, you do not need the money, so you could deposit it.
dollars in a bank account that pays 8% annual compound interest. What value of
Plo would be indifferent to his choice between dollars today and the promise of $8,000 in the future.
to finish the five years?
Solution:
• Data:
I=8%
N=5 years
$8,000
• Determine:
P=$8,000(1 +0.08)-5
p = $8,000(P/F, 8%, 5)
$5,444.80
2.8 Which of the following options would you choose, assuming an interest rate
annual compound of 8%?
Alternative 1: Receive $100 today;
Alternative 2: Receive $120 in two years.
Solution:
Alternative 1
$100
Alternative 2
P = $120(P/F, 8%, 2)
P=$120(1+0.08)-2
P=$120(0.8573)=$102.88
Alternative 2 is preferable
2.9 Indicate the accumulated amount for each of the following investments:
$7,000 in 8 years at 9% annual compound interest.
$1,250 in 12 years at 4% annual compound interest.
$5,000 in 31 years at 7% annual compound interest.
$20,000 in 7 years at 6% annual compound interest.
Solution:
(a) F=$7,000(F/P,9%,8)=$7,000(1+0.09)-8$7,000(1.9926)=$13,948.2
(b)F=$1,250(F/P,4%,12)=$1,250(1+0.04)-12 $1,250(1.6010)=$2,001.25
(c)F=$5,000(F/P,7%,31)=$5,000(1+0.07)-31$5,000(8.1451)=$40,725.5
F = $20,000 (F/P, 6%, 7) = $20,000 (1 + 0.06)7$20,000(1.5036)=$30,072
2.12 In how many years will an investment triple if the interest rate is 7% compounded?
annual?
F = 3P = P(1 + 0.07)N log 3
= N log 1.07
N = 16.24 years
N= 17 years
You acquired 100 shares of Cisco for $2,630 on December 31, 2006.
The intention is to hold onto those shares until they double in value. If you expect a
annual growth of Cisco at 12%, how many years do you plan to hold the shares?
Compare your answer with the solution obtained using the rule of 72 (presented in the
example 2.7).
F = 2P = P(1+0.12)N
- log 2 = N log 1.12
N = 6.12 years
Rule of 72: 72/12 = 6 years
2.15 Juan and Susana have just opened a savings account at two different banks.
Each one deposited $1,000. Juan's bank pays simple interest at an annual rate of 10%,
while Susana's bank pays compound interest at an annual rate of 9.5%.
For a period of three years, neither the capital nor the interest will be withdrawn from the accounts.
At the end of the three years, who will have the highest balance and by how much will it be greater?
(rounding to the nearest dollar)?
Solution:
Simple Interest:
I=iPN= (0.1)($1,000)(3) = $300
Compound Interest:
I=P [(1+i)N$1,000 [(1 + 0.095)]3–1]
$312.93