The question I have reads as follows:
1. Given: $10,000 at time zero, Interest rate = 5% per year
Find: (a) Future equivalent amount at the end of year 11
(b) Future equivalent amount at the end of 18.5 years
(c) Annual equivalent amount at the end of years 1, 2, 3 and 4
(d) Annual equivalent amount at the end of years 8, 9, 10, 11, 12, and 13
I’m pretty sure I did (a) and (b) correctly. As far as I can tell its just a simple future amount question. I just plugged it into the equation that I have:
F=P(F\P)i,n where(f/p) is a table value based on the values of i, n
= 10,000(1.71)
= 17,100
For (b) I used had to use the equation:
F=P(1+i)^n
and came up with 24,660.51
As I’m said I feel fairly confident on these but I’m confused on what is wanted in (c) and (d). Does it want the total amount that you would have after each time period? And if this is so do I essentially have to repeat the previous equation a few times for each time period? Or is the question asking for something like the annuity, how much you would have to gain every year if you wanted to regain the 10,000 with the specified interest. Or is it something different all together. Any ideas or suggestions you have on any of the portions are greatly appreciated.
Thanks!
Cthulhu fhtagn!
April 9, 2010 at 11:32 pm
Annual equivalent amount is the payment made at the end of each year, such that the total present value of payment is equal to 10,000.
This is precisely like mortgage or financing a car, except payments are annual rather than monthly.
The way to compute is to use annuity formula: http://en.wikipedia.org/wiki/Annuity_(finance_theory)
For (c), you apply it directly,
for (d), first compute FV at end of year 7, then use annuity on that over 6 years (8-13)