Assume that Pearl Williams desires to accumulate $750,000 in 14 years using her money market fund balance of $105,996.
At what interest rate must Pearl's investment compound annually?
An amount of $1 expected at a future date of say at the end of 10 years, refers to the $1 as the future value of the money. It is to e estimated that what amount should be invested today, that along with compounded interest would become $1 at the end of 10 years.
Answer and Explanation:
Computation of interest rate required for the desired fund:
Desired fund balance = $750,000
Number of years for which deposits to be remained invested = 14 years
Deposit amount at the beginning of the year 1 = $105,996
So, the future value factor of $1 for a single sum = Desired fund balance / initial investment
= $750,000 / $105,996
Looking at the future value of a single sum table, the future value factor of 7.0757 corresponds to 15% for the period of 14 years.
So, the interest rate at which the investment is to be compounded annually to meet desired fund balance of $750,000 = 15%
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from Financial Accounting: Help and ReviewChapter 5 / Lesson 16