Ross Co., a company that you regularly do business with, gives you a $10,000 note. The note is due in three years and pays simple interest of 5% annually. How much will Ross pay you at the end of that term? Note: Enter the interest rate as a decimal. (i.e. 15% would be entered as .15)

Principal + (Principal X Rate X Time ) = Total

$10,000 $________ 0.05 3 Years 11,500

With compound interest, the interest is added to principal in the calculation of interest in future periods. This addition of interest to the principal is called compounding. This differs from simple interest, in which interest is computed based upon only the principal. The frequency with which interest is compounded per year will dictate how many interest computations are required (i.e. annually is once, semi-annually is twice, and quarterly is four times).

Imagine that Ross Co., fearing that you wouldn't take its deal, decides instead to offer you compound interest on the same $10,000 note. How much will Ross pay you at the end of three years if interest is compounded annually at a rate of 5%? If required, round your answers to the nearest cent.

Principal Annual Amount of Accumulated Amount at

Amount at Interest (Principal at End of Year (Principal at

Beginning of Beginning of Year x Beginning of Year + Annual

Year Year 5%) Amount of Interest)

1 $10,000 $500 $10,500

2 $10,500 $_________ $___________

3 $________ $__________ $___________

Table1 - Present Value of $1 at Compound Interest

Period 5% 6% 7% 8% 9% 10% 11% 12%

1 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893

2 0.907 0.890 0.873 0.857 0.842 0.826 0.812 0.797

3 0.864 0.840 0.816 0.794 0.772 0.751 0.731 0.712

4 0.823 0.792 0.763 0.735 0.708 0.683 0.659 0.636

5 0.784 0.747 0.713 0.681 0.650 0.621 0.593 0.567

6 0.746 0.705 0.666 0.630 0.596 0.564 0.535 0.507

7 0.711 0.665 0.623 0.583 0.547 0.513 0.482 0.452

8 0.677 0.627 0.582 0.540 0.502 0.467 0.434 0.404

9 0.645 0.592 0.544 0.500 0.460 0.424 0.391 0.361

10 0.614 0.558 0.508 0.463 0.422 0.386 0.352 0.322

11 0.585 0.527 0.475 0.429 0.388 0.350 0.317 0.287

12 0.557 0.497 0.444 0.397 0.356 0.319 0.286 0.257

13 0.530 0.469 0.415 0.368 0.326 0.290 0.258 0.229

14 0.505 0.442 0.388 0.340 0.299 0.263 0.232 0.205

15 0.481 0.417 0.362 0.315 0.275 0.239 0.209 0.183

16 0.458 0.394 0.339 0.292 0.252 0.218 0.188 0.163

17 0.436 0.371 0.317 0.270 0.231 0.198 0.170 0.146

18 0.416 0.350 0.296 0.250 0.212 0.180 0.153 0.130

19 0.396 0.331 0.277 0.232 0.194 0.164 0.138 0.116

20 0.377 0.312 0.258 0.215 0.178 0.149 0.124 0.104

You may want to own a home one day. If you are 20 years old and plan on buying a $200,000 house when you turn 30, how much will you have to invest today, assuming your investment yields an 8% annual return? $__________

Table 2 - Present Value of an Ordinary Annuity of $1 at Compound Interest

Period 5% 6% 7% 8% 9% 10% 11% 12%

1 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893

2 1.859 1.833 1.808 1.783 1.759 1.736 1.713 1.690

3 2.723 2.673 2.624 2.577 2.531 2.487 2.444 2.402

4 3.546 3.465 3.387 3.312 3.240 3.170 3.102 3.037

5 4.329 4.212 4.100 3.993 3.890 3.791 3.696 3.605

6 5.076 4.917 4.767 4.623 4.486 4.355 4.231 4.111

7 5.786 5.582 5.389 5.206 5.033 4.868 4.712 4.564

8 6.463 6.210 5.971 5.747 5.535 5.335 5.146 4.968

9 7.108 6.802 6.515 6.247 5.995 5.759 5.537 5.328

10 7.722 7.360 7.024 6.710 6.418 6.145 5.889 5.650

11 8.306 7.887 7.499 7.139 6.805 6.495 6.207 5.938

12 8.863 8.384 7.943 7.536 7.161 6.814 6.492 6.194

13 9.394 8.853 8.358 7.904 7.487 7.103 6.750 6.424

14 9.899 9.295 8.745 8.244 7.786 7.367 6.982 6.628

15 10.380 9.712 9.108 8.559 8.061 7.606 7.191 6.811

16 10.838 10.106 9.447 8.851 8.313 7.824 7.379 6.974

17 11.274 10.477 9.763 9.122 8.544 8.022 7.549 7.120

18 11.690 10.828 10.059 9.372 8.756 8.201 7.702 7.250

19 12.085 11.158 10.336 9.604 8.950 8.365 7.839 7.366

20 12.462 11.470 10.594 9.818 9.129 8.514 7.963 7.469

The controller at Ross has determined that the company could save $4,000 per year in engineering costs by purchasing a new machine. The new machine would last 10 years and provide the aforementioned annual monetary benefit throughout its entire life. Assuming the interest rate at which Ross purchases this type of machinery is 10%, what is the maximum amount the company should pay for the machine? $___________