(a) and (b) for all situations

Case Study 71 CASE STUDY THE AMAZING IMPACT OF COMPOUND INTEREST Background on Five Situations company skyrocketed to become a world leader in elec- 1. The first mass produced automobile was the Ford Model tronic equipment, computers, and a wide range of other T, initially manufactured and sold in 1909 for $825. The products. If the net cash flow averaged $150,000 per rate of inflation in the United States over the period year from 1957 to 2017 (60 years) at the same rate, 1909 to 2015 has averaged 3.10% per year. You just pur- these two individuals would be quite wealthy. chased a new car for $28,000. You wonder what the cost 5. Assume that when your great-grandmother was 25 of this same car might be 50 years from now when your years old, she received an engagement ring from her husband-to-be. He paid $50 for the ring containing a son may be purchasing a similar car for his daughter single, high-quality diamond. When she passed away at (your granddaughter) so she can attend college. Also, the age of 90, the ring went to your grandmother, who you wonder what the value of the Model T will be 50 kept it for 60 years and then gave it to your mother. years in the future, that is, in the year 2065. After 30 years of keeping the ring in a safe place, she 2. The purchase price of Manhattan Island, where much of gave it to you on your 24th birthday. Today is your 48th the city of New York is concentrated, in the year 1626 birthday and you have just discovered the ring in a desk was $24. After 391 years in 2017, you wonder what the drawer, forgotten for all these years. If this high-grade value of the land might be, provided it has appreciated diamond has been now appraised as a collector's grade in value at a rate of 6% per year, every year. stone, which has appreciated in value at an average rate 3. Last week, your friend Jeremy borrowed $200 from of 4% per year, every year, since it was first purchased, pawn shop operator because he was totally broke. He you wonder what the ring might be valued at today. was to pay the operator $230 after 1 week, but missed the payment. At first, you thought this was "no big deal," Team Exercises but then started to realize that the interest was $30 the For each situation described, do the following using a five- first week alone and would increase, compounded at the person team. same rate until the total debt was repaid. When your friend told you he would pay off the loan in a year (pro (a) Determine the annual compound interest or inflation vided the operator didn't come after him), you gave him rate and discuss the differences in these rates from one the results of your analysis. He was shocked and paid the situation to another. total amount immediately. (b) First, each member of the team should make an estimate 4. In 1939, two people teamed up to manufacture and mar (a guess) of the beginning and ending amounts of money ket electronic test equipment. By 1957, the initial capi involved for each situation. Each team member should tal investment from themselves and a few friends that now calculate the two amounts for one selected situation. amounted to only $80,805.12 in 1939 had increased Between team members, discuss the accuracy of their value to an equivalent of $1 million. After this, the first estimates compared to the actual amounts calculated