ACC 311 Lecture Notes - Lecture 6: Compound Interest, Financial Statement, Accrued Interest

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crimsoncod838

12 Dec 2017

School

University of Miami

Department

Accounting Business Administration

Course

ACC 311

Professor

andrewmcmartin

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Document Summary

Compound interest is the eighth wonder of the world. He who understands it, earns it he who doesn"t pays it. albert einstein. ,500 x (1 + 7%) x (1 + 7%) = ,500 x (1 + 7%) Future value of a single amount amount accumulated at a future time from a single payment or investment: Note the inverse relationship between interest rates and future value. I annual percentage rate (w/ annual compounding) Note the tables at the back of these lecture notes! The future value factor: simply multiply the present value by the future value factor that corresponds with i, and n, in order to arrive at the future value. Q: compute the amount that a ,000 investment today would accumulate at 6% (compound interest) by the end of 5 years. (note that more tables are included in the back of the notes). Note: the term annual percentage rate ( apr ) is defined by the truth in lending.

Related Questions

Part I:
Solve 4 of the following time value of money problems by filling inthe 4 columns to the right of the description.
Be sure to solve 1 problem from each of the following 4 categorieslisted under Problem Types. I have completed the first row as anexample.

Part II:
Discuss how you may use time value of money concepts in yourpersonal life. For example, saving for college tuition orretirement, paying off a car loan or home mortgage. Give specificdetails as to how you would use these formulas for more effectivedecision making. Create 1 description and fill in the table foryour newly created question.

Problem Types:
1 pv = present value of $1
2 fv = future value of $1
3 PVAo = Present Value of an Ordinary Annuity of$1 (payment at end of period)
4 FVAo = Future Value of an Annuity of $1(payment at end of period)

	Description	Type of Problem	Table	Formula	Answer
1	How much money must your rich unclegive you now to finance four years of college, assuming an annualcost of $48,000 and an interest rate of 6% (applied to theprincipal until disbursed)?	Present Value of anordinary Annuity	PVAo	PV = 48,000(3.465)	$166,325.07
2	How much interest would you earn ifyou deposited $300 at 6 percent for 27 months?
3	If you deposit $2,000 in a 5-yearcertificate of deposit at 5.2%, how much will it be worth in fiveyears?
4	How much interest would you pay toborrow $670 for eight months at 12 percent?
5	You wish to borrow $18,000 to buy anew auto-mobile. Rate is 8.6% over five years with monthlypayments. Find the monthly payment.
6	What is the future value of $800 at8 percent after six years?
7	How much would you have in savingsif you kept $200 on deposit for eight years at 8% compoundedsemiannually?
8	You choose to invest $50/month in a401(k) that invests in an international stock mutual fund. Assumingan annual rate of return of 9%, how much will this fund worth ifretiring in forty years?
9	What is the future value of anannual deposit of $230 earning 6 percent for 15years?
10	If you invest $600/Year in a 401(k)that invests in an international stock mutual fund. Assuming anannual rate of return of 9%, how much will this fund worth ifretiring in forty years?
11	What amount would you have in aretirement account if you made annual deposits of $375 for 25 yearsearning 12 percent, compounded annually?
12	What is the present value of $2,200earning 15 percent for eight years?
13	How much money must you set asideat age 20 to accumulate retirement funds of $100,000 at age 65,assuming a rate of interest of 7%?
14	To have $6,000 for a childâseducation in 10 years, what amount should a parent deposit in asavings account that earns 12 percent, compoundedquarterly?
15	If you deposit $2,000 in a 5-yearcertificate of deposit at 5.2% with quarterly compounding, how muchwill it be worth in five years?
16	What is the present value of awithdrawal of $200 at the end of each year for 14 years with aninterest rate of 7 percent?
17	How much would you have to depositnow to be able to withdraw $650 at the end of each year for 20years from an account that earns 11 percent?
18	What would be the annual paymentamount for a $20,000, 10-year loan at 7 percent?

ochremallard624

1) Joe's Hardware is adding a new product line that will requirean investment of $1,476,000. Managers estimate that this investmentwill have a 10-year life and generate net cash inflows of $300,000the first year, $290,000 the second year, and $240,000 each yearthereafter for eight years. Assume the project has no residualvalue.

a. Compute the ROR for the investment (round answer to 2 decimalplaces)

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2) White, Co., is considering acquiring a manufacturing plant.The purchase price is $1,100,000. The owners believe the plant willgenerate net cash inflows of $314,000 annually. It will have to bereplaced in seven years.

a. Use the payback method to determine whether White shouldpurchase this plant. (round answer to 1 decimal place) The paybackperiod for the plant is ____years.

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3) Assume you want to retire early at age 52. You plan to saveusing one of the following two strategies: (1) save $2700 a year inan IRA beginning when you are 27 and ending when you are 52 (25years) or (2) wait until you are 37 to start saving and then save$4,500 per year for the next 15 years. Assume you will earn thehistoric stock market average of 10% per year.

a) How much out of pocket cash will you invest under the twooptions?

b) How much savings will you have accumulated at age 52 underthe two options?

c) explain results

d) If you were to let the savings continue to grow for 10 moreyears (with no further out of pocket investments), what would theinvestments be worth when you are age 62?

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4) Your best friend just received a gift of $9000 from hisfavorite aunt. He wants to save the money to use as "starter" moneyafter college. He can invest it (1) risk- free at 8%, (2) taking onmoderate risk at 12% or (3) taking on high risk at 16%

Begin by computing the future value of the investment under theeach of the three options. (round the investments worth to thenearest whole dollar)

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5) Janice wants to take the next six years off work to travelaround the world. She estimates her annual cash needs at $33,000(if she needs more, she will work odd jobs) . Janice believes shecan invest her savings at 10% until she depletes her funds.

a)How much money does Janice need now to fund her travels? Withthe 10% interest rate, Janet needs: $______

b) After speaking with a number of banks, Janice learns she'llonly be able to invest her funds at 4%. How much does she need nowto fund her travels?

graycod70

1Your family owns a velociraptor skeleton that is currentlyvalued at $86.7 thousand. Your grandfather, being an avid fossilcollector, bought it 50 years ago for $24.8 thousand. If theskeleton keeps appreciating at the same average annual rate, whatwould be its value 25 years from now?

2You would like to establish a trust fund that would pay annualpayments to your heirs of $98 thousand a year forever. You expectthe trust fund to earn an average return of 8.84 percent. How muchdo you need to deposit into this trust fund today to achieve yourgoal?

3You are thinking of investing in a project that will pay you$100,000 7 years from now, and another $100,000 10 years from now.You think the right discount rate for the project is 6.9%. What isthe maximum you should be willing to pay for this investment?

4A firm recently purchased a new facility costing $962 thousand.The firm financed this purchase with an amortized loan at aninterest rate of 9.7 percent APR, with monthly payments of $16.1thousand. How long will it take to pay off this loan? (Enter answerin months, accurate to two decimal places.)

5An investment is expected to produce $2,370 at the end of eachyear for the next 10 years. Other investments of similar riskinessavailable to you are yielding 8.4 percent return. What is themaximum you should be willing to pay for this investment?

6You are not thrilled about spending your entire life working.So, you have decided that you will save $6 thousand a year,starting at the end of this year, and retire as soon as you canaccumulate $1 million. If you can earn an average of 8.47 percenton your savings, how many years will pass before you get toretire?

7How much money must you invest today, at 7.7 percent fixedannual interest rate, in order to have 10 thousand in 13 years?

8You have $1,895 today, and want to double your money in 19years. What interest rate must you earn to achieve your goal?

9The house you want to buy costs $260 thousand. You plan to makea cash down payment of 10 percent, and borrow the rest in a 30 yearmortgage at 4.8 percent APR. What will be the amount of yourmonthly mortgage payment?

10You estimate that you will need $771 thousand in 30 years tobuy some cybernetic body enhancements, including infrared vision,retractable claws, and expanded brain storage capacity. To achieveyour financial goal, you want to make three equal-sized depositsinto an account paying a fixed annual rate of 8.82%. The firstdeposit will be made right now, the second 10 years from now, andthe third 20 years from now. What is the size of each deposit youneed to make in order to partake of future cybernetic goodness?(Hint: draw this out on a timeline.)

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ACC 311 Lecture Notes - Lecture 6: Compound Interest, Financial Statement, Accrued Interest

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