Quiz 2: Time Value of Money

Business

Given information: • Amount deposited is $2,000. • At simple interest rate of 6 percent. • Time period for withdrawal is 5 year. The total amount of interest earned from present deposit: The total amount of interest earned from present deposit can be calculated by using the following formula: img …… (1)Where, I = Total amount of interest rate earned P = Present value N = Number of years i = Rate of interest Substitute the respective values in Equation (1), to obtain the total amount of interest earned from the present deposit. img Hence, the total amount of interest earned from the present deposit is img .

Given information: An account cash balance after 10 years at 8 percent compound interest rate is expected to be $10,000. The present equivalent worth of the future cash flow: The present equivalent worth of the future cash flow can be calculated by using the following formula: img …… (1)Where, P = Present value F = Future worth value N = Number of years i = Rate of interest Substitute the respective values in Equation (1) to obtain the amount of money to be deposited in the account at current period. img Since the present equivalent worth of deposited amount is img , option (b) is selected.

The given information: Deposit amount is $3,000 Simple interest rate is 8% Interest rate compounded annually is 7% Formula: Future value: Simple interest rate is represented as follows: img …… (1)Future value formula by using interest rate compounded annually is represented as follows: img Here, i = Interest rate n = Number of years Time taken to double the balance: i = 8% P = 3,000 Substitute the given values in equation (1) to get the time period to double the balance this can be calculated as follows: img Thus, the number of years to double the investment at 8 percent simple interest rate is img Time taken by present worth of savings to double: i = 7% compounded annually P = 3,000 Substitute the given values in equation (2) to get the time period to double the balance this can be calculated as follows: img Taking log on both sides to get the value of t, img Thus, the number of years to double the investment at 7% interest compounded annually is img