FI – 360

Chapter 3

P3-1) You have $1,500 to invest today at 7 percent interest compounded annually.

A - How much will you have accumulated in the account at the end of the following number of years? 1). Three years PV x (1.07)^3 $1,500 x (1.07)(1.07)(1.07) $1,500 x 1.225043 = $1837.5645 = $1,837.56

2). Six years PV x (1.07)^6 $1,500 x (1.07)(1.07)(1.07)(1.07)(1.07)(1.07) $1,500 x 1.500730351849 = $2,251.0955 = $2,251.10

3). Nine years PV x (1.07)^9 $1,500 x (1.07)(1.07)(1.07)(1.07)(1.07)(1.07)(1.07)(1.07)(1.07) $1,500 x 1.838459212420155 = $2,757.6888 = $2,757.69

B - Use your findings in part (a) to calculate the amount of interest earned in 1). Years 1 to 3 $1,837.56 - $1,500 = $337.56

2). Years 4 to 6 $2,251.10 - $1,837.56 = $413.56

3). Years 7 to 9 $2,757.69 - $2,251.10 = $506.59

C - Compare and contrast your findings in part (b). Explain why the amount of interest earned increases in each succeeding 3-year period.
With the compounding interest and the longer that the interest is collected the more amount of interest will be collected. In the case you will make more interest between 7 to 9yrs than you will with 4 to 6 or 1 to 3 yrs.

P3-2) Dixon Shuttleworth has been offered the choice of three retirement-planning investments. The first investment offers a 5 percent return for the first 5 years, a 10 percent return for the next 5 years, and a 20 percent return thereafter. The second investment offers 10 percent for the first 10 years and 15 percent thereafter. The third investment offers a constant 12 percent rate of return. Determine, for each of the given number of years, which of these investments is the best for Dixon if he plans to make one payment today into one of these funds and plans to retire in the following number of years.

A). 15 years 1) - (1.05)^5 x