Solutions for recommended problems from Chapter 5

1. (LO1)
The simple interest per year is:
$6,000 × 0.07= $420

So after 9 years of simple interest you will have:

$420 × 9 = $3,780 in interest.
The total balance will be $6,000 + $3,780 = $9,780

With compound interest we use the future value formula:

FV = PV(1 +r)t
FV = $6,000(1.07)9 = $11,030.76

The difference is:

$11,030.76– $9,780 = $1,250.76

2. (LO1) To find the FV of a lump sum, we use:

FV = PV(1 + r)t

FV = $2,250(1.10)11 = $ 6,419.51
FV = $8,752(1.08)7 = $ 14,999.39
FV = $76,355(1.17)14 = $687,764.17
FV = $183,796(1.07)8 = $315,795.75

3. (LO2) To find the PV of a lump sum, we use:

PV = FV / (1 + r)t

PV = $15,451 / (1.07)6 = $10,295.65

PV = $51,557 / (1.13)7 = $21,914.85
PV = $886,073 / (1.14)23 = $43,516.90
PV = $550,164 / (1.19)18 = $24,024.09

4. (LO3) We can use either the FV or the PV formula. Both will give the same answer since they are the inverse
of each other. We will use the FV formula, that is:

FV = PV(1 + r)t

Solving for r, we get:

r = (FV / PV)1 / t – 1

FV = $297 = $240(1 + r)4; r = ($297 / $240)1/4 – 1 = 5.47%

FV = $1080 = $360(1 + r)18; r = ($1080 / $360)1/18 – 1 = 6.29%
FV = $185,382 = $39,000(1 + r)19; r = ($185,382 / $39,000)1/19 – 1 = 8.55%
FV = $531,618 = $38,261(1 + r)25; r = ($531,618 / $38,261)1/25 – 1 = 11.10%

5. (LO5) We can use either the FV or the PV formula. Both will give the same answer since they are the inverse
of each other. We will use the FV formula, that is:

FV = PV(1 + r)t

Solving for t, we get:

 t = ln(FV / PV) / ln(1 + r)

FV = $1,389 = $560(1.09)t; t = ln($1,389 / $560) / ln (1.09) = 10.54 years

FV = $1,821 = $810(1.10)t; t = ln($1,821 / $810) / ln (1.10) = 8.50 years
FV = $289,715 = $18,400(1.17)t; t = ln($289,715 / $18,400) / ln (1.17) = 17.56 years
FV = $430,258 = $21,500(1.15)t; t = ln($430,258 / $21,500) / ln (1.15) = 21.44 years

16. (LO3) We can use either the FV or the PV formula. Both will give the same answer since they are the inverse
of each other. We will use the FV formula, that is:

FV = PV(1 + r)t

Solving for r, we get:

r = (FV / PV)1 / t – 1

a. PV = $100 / (1 + r)6 = $76.04

r = ($100 / $76.04)1/6 – 1 = 4.67%

b. PV = $81 / (1 + r)1 = $76.04

r = ($81 / $76.04)1/1 – 1 = 6.52%

c. PV = $100 / (1 + r)5 = $81.00

r = ($100 / $81)1/5 – 1 = 4.30%

17. (LO3) The time line from minting to the first sale is:

0 192

–$15 $430,000

To answer this question, we can use either the FV or the PV formula. Both will give the same answer since
they are the inverse of each other. We will use the FV formula, that is:

FV = PV(1 + r)t

Solving for r, we get:

r = (FV / PV)1 / t – 1
r = ($430,000 / $15)1/192 – 1 = .0549, or 5.49%

The time line from the first sale to the second sale is:

0 35

–$430,000 $4,582,500

To answer this question, we can use either the FV or the PV formula. Both will give the same answer since
they are the inverse of each other. We will use the FV formula, that is:

FV = PV(1 + r)t

Solving for r, we get:

r = (FV / PV)1 / t – 1
 r = ($4,582,500 / $430,000)1/35 – 1 = .0699, or 6.99%
The time line from minting to the second sale is:

0 227

–$15 $4,582,500

To answer this question, we can use either the FV or the PV formula. Both will give the same answer since
they are the inverse of each other. We will use the FV formula, that is:

FV = PV(1 + r)t

Solving for r, we get:

r = (FV / PV)1 / t – 1
r = ($4,582,500 / $15)1/227 – 1 = .0572, or 5.72%

19. (LO1) To find the FV of a lump sum, we use:

FV = PV(1 + r)t

FV = $5,000 (1.11)45 = $547,651.21

FV = $5,000 (1.11)35 = $192,874.26

This suggests investing earlier is much better than investing later.

20. (LO1) We need to find the FV of a lump sum. However, the money will only be invested for six years, so the
number of periods is six.

FV = PV(1 + r)t
FV = $15,000(1.071)6 = $22,637.48

21. (LO3) We can use either the FV or the PV formula. Both will give the same answer since they are the inverse
of each other. We will use the FV formula, that is:

FV = PV(1 + r)t

Solving for t, we get:

t = ln(FV / PV) / ln(1 + r)

t = ln($75,000 / $10,000) / ln(1.11) = 19.31

So, the money must be invested for 19.31 years. However, you will not receive the money for another two
years. From now, you’ll wait:

2 years + 19.31 years = 21.31 years

Calculator Solutions
1. (LO1)
Enter 9 7% $6,000
N I/Y PV PMT FV
Solve for $11,030.76

$11,030.76 – $8,780 = $2,250.76

2. (LO1)
Enter 11 10% $2,250
N I/Y PV PMT FV
Solve for $6,419.51

Enter 7 8% $8,752
N I/Y PV PMT FV
Solve for $14,999.39

Enter 14 17% $76,355

N I/Y PV PMT FV
Solve for $687,764.17

Enter 8 7% $183,796
N I/Y PV PMT FV
Solve for $315,795.75

3. (LO2)
Enter 6 7% $15,451
N I/Y PV PMT FV
Solve for $10,295.65

Enter 7 13% $51,557

N I/Y PV PMT FV
Solve for $21,914.85

Enter 23 14% $886,073

N I/Y PV PMT FV
Solve for $ 43,516.90

Enter 18 9% $550,164
N I/Y PV PMT FV
Solve for $116,631.32
4. (LO3)
Enter 4 $240 ±$297
N I/Y PV PMT FV
Solve for 5.47%

Enter 18 $360 ±$1080

N I/Y PV PMT FV
Solve for 6.29%

Enter 19 $39,000 ±$185,382

N I/Y PV PMT FV
Solve for 8.55%

Enter 25 $38,261 ±$531,618

N I/Y PV PMT FV
Solve for 11.10%

5. (LO3)
Enter 9% $560 ±$1,389
N I/Y PV PMT FV
Solve for 10.54

Enter 10% $810 ±$1,821

N I/Y PV PMT FV
Solve for 8.50

Enter 17% $18,400 ±$289,715

N I/Y PV PMT FV
Solve for 17.56

Enter 15% $21,500 ±$430,258

N I/Y PV PMT FV
Solve for 21.44

16. a. (LO3)
Enter 6 ±$76.04 $100
N I/Y PV PMT FV
Solve for 4.67%

16. b.
Enter 1 ±$81 $76.04
N I/Y PV PMT FV
Solve for 6.52%
16. c.
Enter 5 ±$81 $100
N I/Y PV PMT FV
Solve for 4.3%

19. (LO1)
Enter 45 11% $5,000
N I/Y PV PMT FV
Solve for $547,651.21

Enter 35 11% $5,000

N I/Y PV PMT FV
Solve for $192,874.26

20. (LO1)
Enter 6 7.10% $15,000
N I/Y PV PMT FV
Solve for $22,637.48

21. (LO3)
Enter 11% ±$10,000 $75,000
N I/Y PV PMT FV
Solve for 19.31

From now, you’ll wait 2 + 19.31 = 21.31 years