Purpose: This exercise will illustrate how to solve present value problems that require the computation of the rent in an annuity or the number of periods or the interest rate.
Instructions
Using the appropriate interest table, provide the solution to each of the following four questions by computing the unknowns.
(a) Jimmy Gunshanan has $5,000 to invest today at 5% to pay a debt of $7,387. How many years will it take him to accumulate enough to liquidate the debt if interest is compounded once annually?
(b) Jimmy's friend Nathan has a $6,312.40 debt that he wishes to repay four years from today. He intends to invest $5,000.00 for four years and use the accumulated funds to liquidate the debt. What rate of interest will he need to earn annually in order to accumulate enough to pay the debt if interest is compounded annually?
(c) Patricia McKiernan wishes to accumulate $35,000 to use for a trip around the world. She plans to gather the designated sum by depositing payments into an account at Sun Bank which pays 4% interest, compounded annually. What is the amount of each payment that Patricia must make at the end of each of six years to accumulate a fund balance of $35,000 by the end of the sixth year?
(d) Your sister is twenty years old today and she wishes to accumulate $900,000 by her fifty-fifth birthday so she can retire to her summer place on Lake Tahoe. She wishes to accumulate the $900,000 by making annual deposits on her twentieth through her fifty- fourth birthdays. What annual deposit must your sister make if the fund will earn 8% interest compounded annually?