Chapter 3 Finance End Of Chapter Questions

End of Chapter Answers

Chapter 1

1. Using the rule of 72, approximate the following amounts. (Obj. 1)

a. If the value of land in an area is increasing 6 percent a year, how long will it take for property values to double?

About 12 years (72 / 6)

b. If you earn 10 percent on your investments, how long will it take for your money to double?

About 7.2 years (72/ 10)

c. At an annual interest rate of 5 percent, how long will it take for your savings to double?

About 12 years (72 / 5)

2. In the early 2000s, selected automobiles had an average cost of $15,000. The average cost of those same automobiles is now $18,000. What was the rate of increase for these automobiles between the two time periods?

($18,000 - $15,000) / $15,000 =.20 (20 percent)


3. A family spends $34,000 a year for living expenses. If prices increase by 4 percent a year for the next three years, what amount will the family need for their living expenses after three years?

$34,000 [pic] 1.12 = $38,080; or using Exhibit 1-A: $34,000 [pic] 1.125 = $38,250


4. Ben Collins plans to buy a house for $120,000. If that real estate is expected toincrease in value by 5 percent each year, what will its approximate value be seven years from now?

$120,000 [pic] 1.35 = $162,000; or using Exhibit 1-A: $120,000 [pic] 1.407 = $168,840


5. What would be the yearly earnings for a person with $6,000 in savings at an annual interest rate of 5.5 percent?

$6,000 [pic] 0.055 = $330


6. Using time value of money tables (Exhibit 1–3 orchapter appendix tables), calculate the following:
a. The future value of $450 six years from now at 7 percent.

$450 [pic] 1.501 = $675.45 (Exhibit 1-A)

b. The future value of $800 saved each year for 10 years at 8 percent.

$800 [pic] 14.487 = $11,589.60 (Exhibit 1-B)

c. The amount a person would have to deposit today (present value) at a 6 percent interest rate tohave $1,000 five years from now.

$1,000 [pic] .747 = $747 (Exhibit 1-C)

d. The amount a person would have to deposit today to be able to take out $500 a year for 10 years from an account earning 8 percent.

$500 [pic] 6.710 = $3,355 (Exhibit 1-D)


7. If you desire to have $10,000 for a down payment for a house in five years, what amount would you need to deposit today? Assumethat your money will earn 5 percent.

$10,000 [pic] 0.784 = $7,840 (Exhibit 1-C)


8. Pete Morton is planning to go to graduate school in a program of study that will take three years. Pete wants to have $10,000 available each year for various school and living expenses. If he earns 4 percent on his money, how much must he deposit at the start of his studies to be able to withdraw $10,000a year for three years?

$10,000 [pic] 2.775 = $27,750 (Exhibit 1-D)

9. Carla Lopez deposits $3,000 a year into her retirement account. If these funds have an average earning of 8 percent over the 40 years until her retirement, what will be the value of her retirement account?

$3,000 [pic] 259.060 = $777,180 (Exhibit 1-B)

10. If a person spends $10 a week on coffee (assume $500a year), what would be the future value of that amount over 10 years if the funds were deposited in an account earning 4 percent?

$500 [pic] 12.006 = $6,003 (Exhibit 1-B)


11. A financial company that advertises on television will pay you $60,000 now for annual payments of $10,000 that you are expected to receive for a legal settlement over the next 10 years. If you estimate the timevalue of money at 10 percent, would you accept this offer?

The present value of the annual payment is calculated as: $10,000 X 6.145 = $61,450
The $60,000 being offered now is less than the present value of the future flow.

12. Tran Lee plans to set aside $1,800 a year for the next six years, earning 4 percent. What would be the future value of this savings amount?

$1,800 X...