practice questions

1 Compound Interest Calculated Manually - how it works Calculate the interest and maturity due at the end of each of three years compounding the interest yearly. The original principal is $133,000 and the annual interest rate is 11%. Show your work. Your answer should be equal to 181,895. Show your work. Beginning of the Times the Annual Annual Interest year investment Interest Rate earned that year Ending Principal and Interest yr 1 **note that ending balance is next yr 2 years beginning investment yr 3 2 Using the tables, what would the amount due at maturity of the above problem after 5 years. Use the table, not your Hewlert-Packard. Times the Future Beginning of the Value Factor for 5 year investment years at 11% Blank Ending Value 3 Insurance agents package a surrender value along with life insurance and call it "Whole Life." It is very deceptive. You are told that putting just $100 per month away for 25 years, your surrender value will be $50,000!! Sounds good. In fact, you will have contributed only $30,000 (100*12*25). So, you think this is too good to be true. But, understanding time valu of money you want to look closer. So, calculate this same deal without the insurance premium built in and tell me what your investment would be. Calculate this 3 ways. Consider that we put in $100 12 times a year or $1,200. If we can earn 6% on this over time, what will it be worth? . Do the same math but do 8% instead. Do the same math for 8% over 30 years. 6% for 25 8% for 25 8% for 30 4 Using the present value tables for a lump sum (not the annuity), solve the following Return on investment analysis. A department head wants to buy a $100,000 machine that will cut costs saving the company a lot of money. When pushed, the department head made the following predictions on savings (positive cash flow). You have other investment opportunities, so you will only approve this request if it returns at least 12% return on investment (ROI). Present value factor 12% Present Value of cash flow End of year one cash savings 45,000 End of year two cash savings 28,000 End of year three cash savings 25,000 End of year Four cash savings 18,000 No additional savings anticipated in future years. total savings 116,000 Hint: the present value has been discounted back at 12%, so if it is greater than $100,000 investment, then it is returning a higher than 12% ROI. If it is less than $100,000, then it has an ROI less than 12%