Exercises in Compound Interest ‘Yo be sure that you understand how to use the tables in Appendix B at the end of this book, solve the following exercises.

Do the exercises on your own before checking your answers. The correct answers rounded to the nearest dollar are printed after the last problem in this chapter.

1. You have just won $5,000. How much money will you have at the end of ten years if you invest it at 6 percent compounded annually? Ignore income taxes in this and other parts of this problem.

2. Ten years from now, the unpaid principal of the mortgage on your house will be $8,955. How much do you have to invest today at 6 percent interest compounded annually just to accumulate the $8,955 in ten years?

3. You plan to save $500 of your earnings each year for the next ten years. How much money will you have at the end of the tenth year if you invest your savings compounded at 6 percent per year?
4. If the unpaid mortgage on your house in ten years will be $8,955, how much money do you have to invest annually at 6 percent to have just this amount on hand at the end of the tenth year?
5. You hold an endowment insurance policy that will pay you a lump sum of $20,000 at age 65. If you invest the sum at 6 percent, how much money can you withdraw from your account in equal amounts each year so that at the end of ten years there will be nothing left?
6. You have estimated that for the first ten years after you retire, you will need an annual income of $2,720. How much money must you invest at 6 percent at age 65 to just realize this annual income?
7. The table below shows two schedules of prospective operating cash inflows, each of which requires the same initial investment:
ANNUAL CASH INFLOWS YEAR PLAN A PLAN B 0 $ 1,000 $ 5,000 1 2,000 4,000 2 3,000 3,000 3 4,000 2,000 4 5,000 1,000 Total $15,000 $15,000 The minimum desired rate of return is 6 percent compounded annually. In terms of present values, which plan is more desirable? Show computations. L01