Chapter 4 Assignment Example | Topics and Well Written Essays - 250 words

Chapter 4 - Assignment Example The correct answer is (c), to solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the PV of the negative CFs. This is, essentially, a trial and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise. The formula for effective rate of r= (1+i/n)n- 1, for Riverside Bank, the effective annual interest rate will be, rR = (1 + (0.065/12))^12 = 1.067, while for the Midwest Bank, the effective annual interest rates will be, rM = (1 + (0.07/1))^1 = 1.07. Hence the effective annual rate is higher for Midwest Bank by (1.07 – 1.067) 0.003 or 0.3%. To arrive at the annual contribution for Ed’s trust, first we calculate the total amount that will accrue for Steve in the next 46 years using the formula, FV= (A.(1+i)˄n-1)/i(1+i) where A is the equal annuities, i is the interest rates and n the number of years (Wegner, p 530). From their initial amount of $15,000 at the rate of 9%, they will accumulate, 15,000x (1+0.09)^7 = 27,420.059. From their regular contribution of $5,000, they will accumulate: $5,000 x 1.09^7 + $5,000 x 1.09^6 + $5,000 x 1.09^5 + $5,000 x1.09^4 =$32,276.7, the total will be: = $59,696.76 At t=11, the amount of $8,103.14, will have a deficit of $12,350.54, so an additional amount of $9,536.88 should be saved before the study begins, hence distributing the amount in three equal installments we use the annuity formula, Ax (1.09^3), A =