Chapter 5 Problems

1. Faith invests $4,500 in an account that pays 4 percent simple interest. How much money will
she have at the end of eight years?

2. Jessica invests $3,000 in an account that pays 5 percent simple interest. How much more could
she have earned over a 7-year period if the interest had compounded annually?

3. Jeff invests $3,000 in an account that pays 7 percent simple interest. How much more could he
have earned over a 20-year period if the interest had compounded annually?

4. What is the future value of $3,497 invested for 15 years at 7.5 percent compounded annually?

5. Today, you earn a salary of $42,500. What will be your annual salary 10 years from now if
you earn annual raises of 3.2 percent?

6. You own a classic automobile that is currently valued at $67,900. If the value increases by 8
percent annually, how much will the automobile be worth 15 years from now?

7. You hope to buy your dream house 3 years from now. Today, your dream house costs
$247,900. You expect housing prices to rise by an average of 7.5 percent per year over the next 3
years. How much will your dream house cost by the time you are ready to buy it?

8. Your grandmother invested one lump sum 42 years ago at 3.5 percent interest. Today, she
gave you the proceeds of that investment which totaled $28,204.37. How much did your
grandmother originally invest?

9. What is the present value of $36,800 to be received 6 years from today if the discount rate is
12 percent?

10. You would like to give your daughter $50,000 towards her college education 15 years
from now. How much money must you set aside today for this purpose if you can earn 9 percent
on your investments?

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11. One year ago, you invested $2,500. Today it is worth $2,789.50. What rate of interest did you
earn?

12. Thirty years ago, your father invested $11,000. Today, that investment is worth $287,047.
What is the average annual rate of return your father earned on his investment?

13. Marie needs $26,000 as a down payment for a house 4 years from now. She earns 5.25
percent on her savings. Marie can either deposit one lump sum today for this purpose or she can
wait a year and deposit a lump sum. How much additional money must Marie deposit if she
waits for one year rather than making the deposit today?

14. Wexter and Daughter invested $165,000 to help fund a company expansion project planned
for 3 years from now. How much additional money will the firm have saved 3 years from now if
it can earn 7 percent rather than 5 percent on this money?

15. You just received $278,000 from an insurance settlement. You have decided to set this
money aside and invest it for your retirement. Currently, your goal is to retire 38 years from
today. How much more will you have in your account on the day you retire if you can earn an
average return of 9.5 percent rather than just 9.0 percent?

16. You will be receiving $2,500 from your family as a graduation present. You have decided to
save this money for your retirement. You plan to retire 40 years after graduation. How much
additional money will you have at that time if you can earn an average of 12.5 percent on your
investment instead of just 12 percent?

17. You deposit $1,000 in a retirement account today at 8.5 percent interest. How much more
money will you have if you leave the money invested for 40 years rather than 35 years?

18. You collect old model trains. One particular model increases in value at a rate of 6.5 percent
per year. Today, the model is worth $1,670. How much additional money can you make if you
wait 4 years to sell the model rather than selling it 2 years from now?

19. Some time ago, Richard purchased five acres of land costing $123,400. Today, that land is
valued at $189,700. How long has he owned this land if the price of land has been increasing at
5.5 percent per year?

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20. Pat retires at age 58 and expects to live to age 90. On the day she retires, she has
$287,409 in her retirement savings account. She is conservative and expects to earn 5.25
percent on her money during her retirement years. How much can she withdraw from her
retirement savings each month if she plans to die on the day she spends her last penny?

21. You are buying a previously owned car today at a price of $4,950. You are paying $750
down in cash and financing the balance for 42 months at 8.45 percent. What is the
amount of each loan payment?

22. Your car dealer is willing to lease you a new car for $199 a month for 72 months.
Payments are due on the first day of each month starting with the day you sign the lease
contract. If your cost of money is 5.45 percent, what is the current value of the lease?

23. Starting today, Stephen is going to contribute $200 on the first of each month to his
retirement account. His employer will contribute an additional 50 percent of the amount
Stephen contributes. If both Stephen and his employer continue to do this and he can earn
a monthly rate of 0.75 percent, how much will Stephen have in his retirement account 40
years from now?

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24. Susan Sunshine has been investing $160,000 a year for the past 9 years into Sunshine in a
Can, Inc. Today, as the sole shareholder, she sold Sunshine in a Can, Inc. for $2.6
million. What is her rate of return on this investment?

25. Ottawa Manor would like to buy some additional land and build a new assisted living
center. The anticipated total cost is $12.4 million. The CEO of the firm is quite
conservative and will only do this when the company has sufficient funds to pay cash for
the entire construction project. Management has decided to save $235,000 a month for
this purpose. The firm earns 7 percent compounded monthly on the funds it saves. How
long does the company have to wait before expanding its operations?

26. Your insurance agent is trying to sell you an annuity that costs $165,000 today. By
buying this annuity, your agent promises that you will receive payments of $775 a month
for the next 40 years. What is the rate of return on this investment?

27. You just settled an insurance claim. The settlement calls for increasing payments over a
5year period. The first payment will be paid one year from now in the amount of
$30,000. The following payments will increase by 6 percent annually. What is the value
of this settlement to you today if you can earn 8.5 percent on your investments?

28. A wealthy benefactor just donated some money to the local college. This gift was
established to provide scholarships for worthy students. The first scholarships will be
granted one year from now for a total of $50,000. Annually thereafter the scholarship
amount will be increased by 5 percent to help offset the effects of inflation. The
scholarship fund will last indefinitely. What is the value of this gift today at a discount
rate of 7.5 percent?

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 29. Stevenson Interiors of Kingston has a $67,500 liability they must pay four years from
today. The company is opening a savings account so that the entire amount will be
available when this debt needs to be paid. The plan is to make an initial deposit today and
then deposit an additional $10,000 a year for the next four years, starting one year from
today. The account pays a 5 percent rate of return. How much does the firm need to
deposit today?

30. Mrs. Black established a trust fund that provides $65,000 in scholarships each year for
needy students. The trust fund earns a fixed 5.5 percent rate of return. How much money
did Mrs. Black contribute to the fund assuming that only the interest income is
distributed?

31. You just paid $425,000 for an insurance annuity that will pay you and your heirs $15,000 a
year forever. What rate of return are you earning on this policy?

31. Your father won a lottery years ago. The value of his winnings at the time was $225,000.
He invested this money such that it will provide annual payments of $12,000 a year to his
heirs forever. What is the rate of return?

33. Your credit card company quotes you a rate of 18.9 percent. Interest is billed monthly.
What is the actual rate of interest you are paying?

34. On the day you enter college you borrow $12,000 from your local bank. The terms of the
loan include an interest rate of 5.45 percent. The terms stipulate that the principle is due
in full one year after you graduate. Interest is to be paid annually at the end of each year.
Assume that you complete college in four years. How much will you pay the bank one
year after you graduate?

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