2.36 Compound interest formula: Total amount = P (1 + (R/100))n where P is principal, R is rate, and n is number of years

\$1,200 compounded annually for 5 years at 9% = \$1,846.35

\$1,000 compounded annually for 4 years at 9% = \$1,411.58

\$800 compounded annually for 3 years at 9% = \$1,036.02

\$600 compounded annually for 2 years at 9% =\$712.86

Total amount in the fund immediately after the 5th deposit will be \$1,846.35 + \$1,141.58 + \$1,036.02 + \$712.86 + \$400 (the 5th deposit) = \$5,406.81

2.31 Loan payment formula: monthly payment = [rate + (rate/1 + rate)months – 1] x principal

Amortization schedule for \$20,000 loan payable annually for 5 years at 10% compound interest

 Year Interest Principal Balance 2012 \$1,729.28 \$6,014.85 \$13,985.15 2013 \$1,099.44 \$6,644.68 \$7,340.47 2014 \$403.66 \$7,340.47 \$0.00

Annual payment = \$7,744.13

Interest in second year = \$1,099.44

2.48 In the first diagram, the total cash flow in five years is \$600. At 10% annual compound interest, the principal amount invested at the beginning of year one is \$983. Since the second diagram is said to be equivalent to the first diagram, then the value of X is \$120 (\$600/5 years). This is because in the second diagram, the annual cash flows are equal for all the five years.

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2.49 The total amount of cash flows in the first diagram is \$220. The number of investment is 4 years. The value of C that makes the second investment to be economically equivalent at an interest rate of 10% is \$36.667 [\$220/(c+2c+2c+c)].

2.52 The total amount of inflow is \$9,000 (for eight years). An equal amount of outflow is introduced at the beginning of ever year from year 2 to year 8. However, the initial outlay is as twice as the amount invested every year from year 2. This initial amount yield \$800 at the end of year 1. Since is interest rate is given as 12% p.a, then the initial amount invested is \$6,667 (refer to 2.36 for formula). If 2C = \$6,667, then C = \$3,333.5.

2.54 Formula for calculating present value of annuity:

Total = Amount [(1 + r)n+1 – 1/r] – amount

Present value of annual series of \$5,000 for 10 years at 10% compound interest = \$30,722.84

The amount \$30,722.84 is equivalent to \$8,104.5 invested for 5 years at 10 % compound interest.

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