Exercises in compound interest, no income taxes.

To be sure that you understand how to use the tables in Appendix A at the end of this book,

solve the following exercises. Ignore income tax considerations. The correct answers, rounded to the nearest dollar.

The required rate of return is 6% compounded annually. All cash inflows occur at the end of each year. In terms of net present value, which plan is more desirable? Show your computations.

1.

You have just won $50,000. How much money will you accumulate at the end of 5 years if you invest it at 6% compounded annually?

At 12%?

2.

Twelve years from now, the unpaid principal of the mortgage on your house will be $249,600. How much do you need to invest today

at 6% interest compounded annually to accumulate the $249,600 in 12 years

1 Year 1 2 3 4 5 Total Annual Cash Inflows Plan A Plan B $ 2,000 $ 3,000 3,000 5,000 4,000 9,000 7,000 5,000 9,000 3,000 $25,000 $25,000