Question

1. Suppose you loan Harold $500 at 4% interest (compounding) for 5 years. At the end of 5 years, how much money does Harold owe you? Eve pr(1+2)4 FV = 5006 1+.04)" 584.9292 x 100 - 55492-92 554.9 2. For how many years would you have to loan Harold that $500 at 4% to get $1,000 back? 59 3. Take a look at how much Harold owes you at the end of 5 years (the answer to #1). If you wanted a 7% return on your money, would you loan Harold $450 today for that sum of money? Why or why not?

Answer 1

1.Rate =4%
PV =500
Number of Years =5
FV =PV*(1+r)^n =500*(1+4%)^5 =608.33

2. PV =500
FV =1000
Rate =4%
FV =PV*(1+r)^n
1000=500*(1+4%)^n
Applying log on both sides
log(2)=n*log(1.04)
n=log(2)/log(1.04)=17.67 years

3. FV =PV*(1+r)^n =450*(1+7%)^5 =631.15
Yes we would loan Harold $450 today for that sum of money because FV is greater than the previous FV of question no 1