1.

You have $5,000 which you plan on investing and low and behold someone tells
you that you can earn 14% annual interest on your $5,000. Assuming this is true,
how much would it grow to in 10 years? Note, if you could get 14% return either
the inflation rate is really high or it may be too good to be true.

To calculate how much $5,000 will grow to in 10 years with a 14% annual interest rate, we can
use the compound interest formula:

\[ A = P \left(1 + \frac{r}{100}\right)^t \]

where:
- \( A \) is the amount of money accumulated after \( t \) years, including interest.
- \( P \) is the principal amount ($5,000 in this case).
- \( r \) is the annual interest rate (14%).
- \( t \) is the time the money is invested or borrowed for, in years (10 years).

Substituting the given values:

\[ A = 5000 \left(1 + \frac{14}{100}\right)^{10} \]

First, calculate \( \left(1 + \frac{14}{100}\right) \):

\[ 1 + \frac{14}{100} = 1 + 0.14 = 1.14 \]

Now raise 1.14 to the power of 10:

\[ (1.14)^{10} \approx 4.31787 \]

Now multiply $5,000 by 4.31787:

\[ A \approx 5000 \times 4.31787 \approx 21589.35 \]

Therefore, the amount of money accumulated after 10 years will be approximately \(

\$21,589.35 \).

This calculation shows the power of compound interest over a long period. However, it's
important to note that earning a consistent 14% return annually is uncommon and typically
involves higher risk investments. Always consider the risk and inflation factors when evaluating
investment opportunities.

2. You have $5,000 which you need to double in the next 10 years. What would the
rate of interest be so that your $5,000 nest egg will double in 10 years?
To find the annual interest rate \( r \) needed to double an investment of $5,000 in 10 years, we
can use the formula for compound interest:

\[ A = P \left(1 + \frac{r}{100}\right)^t \]

where:
- \( A \) is the amount of money accumulated after \( t \) years.
- \( P \) is the principal amount ($5,000 in this case).
- \( r \) is the annual interest rate we need to find.
- \( t \) is the time the money is invested for (10 years).

We want the amount \( A \) to be double the principal \( P \):

\[ 2P = P \left(1 + \frac{r}{100}\right)^{10} \]

Divide both sides by \( P \):

\[ 2 = \left(1 + \frac{r}{100}\right)^{10} \]

Take the 10th root of both sides to solve for \( 1 + \frac{r}{100} \):

\[ 1 + \frac{r}{100} = \sqrt[10]{2} \]

Approximately,

\[ \sqrt[10]{2} \approx 1.071773462 \]

Subtract 1 from both sides to find \( \frac{r}{100} \):

\[ \frac{r}{100} \approx 1.071773462 - 1 \]

\[ \frac{r}{100} \approx 0.071773462 \]

Multiply both sides by 100 to solve for \( r \):

\[ r \approx 0.071773462 \times 100 \]

\[ r \approx 7.1773462 \]

Therefore, the annual interest rate \( r \) needed to double your $5,000 investment in 10 years is
approximately \( \boxed{7.18\%} \).

This means you would need to earn around 7.18% annual interest on your $5,000 investment to
see it grow to $10,000 in 10 years.
3. You have a goal of having $5,000 for a down payment on a car in four years. You
know that you can get a CD paying 4% annually for four years. How much will
you need now in order to have your $5,000 in four years?

To determine how much you need to invest now to have $5,000 in four years with a 4% annual
interest rate, we can use the future value formula for compound interest:

\[ A = P \left(1 + \frac{r}{100}\right)^t \]

where:
- \( A \) is the future amount we want ($5,000).
- \( P \) is the principal amount (the amount we need to invest now).
- \( r \) is the annual interest rate (4% or 0.04 as a decimal).
- \( t \) is the time the money is invested for (4 years).

Substitute the given values into the formula:

\[ 5000 = P \left(1 + \frac{0.04}{1}\right)^4 \]

Simplify inside the parentheses:

\[ 5000 = P (1.04)^4 \]

Calculate \( (1.04)^4 \):

\[ (1.04)^4 \approx 1.16985856 \]

Now divide both sides by \( 1.16985856 \) to solve for \( P \):

\[ P = \frac{5000}{1.16985856} \]

\[ P \approx 4272.13 \]

So, you would need to invest approximately \( \boxed{4272.13} \) dollars now in order to have
$5,000 in four years, assuming a 4% annual interest rate compounded “annually.

4. Your gross annual salary is $45,000. Your boss is going to give a $2,000 a year
raise for this year and also for the next 2 years.
a. What is the percentage increase in your salary for the first year?

b. Suppose you invest just the first year raise amount of $2,000 and you get
a 10% annual return on it. How much will it have grown to in 20 years?
c. Suppose you invest $2,000 for the second year raise, and you get a 10%
annual return on it. How much will it have grown to in 19 years?

d. Suppose you invest $2,000 for the third year raise, and you get a 10%
annual return on it. How much will it have grown to in 18 years?

e. Suppose you invest your $2,000 first year raise every year for twenty
years, and you get a 10% annual return on it. How much will it have
grown to in 20 years? (Use the ordinary annuity formula.)

Part a: Percentage Increase in Salary for the First Year

Your initial gross annual salary is $45,000, and your boss is giving you a $2,000 raise for the
first year.

To calculate the percentage increase:

\[ \text{Percentage Increase} = \left( \frac{\text{Raise Amount}}{\text{Initial Salary}} \right) \times
100 \]

Plugging in the numbers:

\[ \text{Percentage Increase} = \left( \frac{2000}{45000} \right) \times 100 \approx 4.44\% \]

Part b: Investment of First Year Raise

You invest the first year raise of $2,000 with an annual return of 10% for 20 years.

Using the compound interest formula:

\[ A = P \left(1 + \frac{r}{n}\right)^{nt} \]

Where:
- \( A \) is the future value of the investment
- \( P \) is the principal investment amount ($2,000)
- \( r \) is the annual interest rate (10% or 0.10)
- \( n \) is the number of times that interest is compounded per year (assumed to be 1)
- \( t \) is the number of years the money is invested (20 years)

Plugging in the numbers:

\[ A = 2000 \left(1 + 0.10\right)^{20} \]

Using Excel or a calculator:

\[ A \approx 2000 \times 6.7275 \approx 13,455 \]

Part c: Investment of Second Year Raise

You invest the second year raise of $2,000 with an annual return of 10% for 19 years.

Using the same compound interest formula:

\[ A = 2000 \left(1 + 0.10\right)^{19} \]

Using Excel or a calculator:

\[ A \approx 2000 \times 6.1159 \approx 12,232 \]

Part d: Investment of Third Year Raise

You invest the third year raise of $2,000 with an annual return of 10% for 18 years.

Using the same compound interest formula:

\[ A = 2000 \left(1 + 0.10\right)^{18} \]

Using Excel or a calculator:

\[ A \approx 2000 \times 5.5665 \approx 11,133 \]

Part e: Investing $2,000 Every Year for 20 Years with 10% Annual Return (Ordinary Annuity)

Using the future value of an ordinary annuity formula:

\[ A = P \left( \frac{(1 + r)^n - 1}{r} \right) \]

Where:
- \( A \) is the future value of the annuity
- \( P \) is the annual payment ($2,000)
- \( r \) is the annual interest rate (10% or 0.10)
- \( n \) is the number of years the payments are made (20 years)

Plugging in the numbers:

\[ A = 2000 \left( \frac{(1 + 0.10)^{20} - 1}{0.10} \right) \]

Using Excel or a calculator:

\[ A = 2000 \left( \frac{6.7275 - 1}{0.10} \right) = 2000 \left( 57.275 \right) = 114,550 \]

a. The percentage increase in salary for the first year is approximately 4.44%.

b. The first year raise of $2,000 will grow to approximately $13,455 in 20 years at a 10% annual
return.

c. The second year raise of $2,000 will grow to approximately $12,232 in 19 years at a 10%
annual return.
d. The third year raise of $2,000 will grow to approximately $11,133 in 18 years at a 10% annual
return.

e. Investing $2,000 every year for 20 years with a 10% annual return will grow to approximately
$114,550.

5. You want to buy a new car and need $5,000, but you have only $3,000. You are
willing to wait 3 years. What percent return on your $3,000 would you need so
that your $3,000 would grow to $5,000 in 3 years?

To determine the percent return needed for your $3,000 to grow to $5,000 in 3 years, we can
use the future value formula for compound interest:

A=P(1+r)tA=P(1+r)t

Where:

● AA is the future value of the investment ($5,000)

● PP is the principal amount ($3,000)
● rr is the annual interest rate
● tt is the time the money is invested (3 years)

We need to solve for rr. Rearranging the formula to solve for rr:

r=(AP)1t−1r=(PA​)t1​−1

Plugging in the values:

r=(50003000)13−1r=(30005000​)31​−1

Let's calculate this step by step.

1. Calculate the ratio: 50003000=53≈1.666730005000​=35​≈1.6667

2. Raise the ratio to the power of 1331​: (1.6667)13(1.6667)31​
3. Subtract 1 from the result to find the annual interest rate.

6. Your annual living expenses are $25,000. Assuming that your spending habits
don’t change over the next 20 years, and the inflation rate would be 4% per year
for that 20 year period, what will be your living expenses 20 years from now? The
purpose of this problem is to help you appreciate how large an effect inflation can
have over a long period of time, even at a low rate of 4%,. This is compounding
working against you for sure – yes?

Yes, this problem illustrates the impact of inflation over time. To calculate your future living
expenses considering a 4% annual inflation rate over 20 years, you can use the future value
formula for compound interest:

FV=PV×(1+r)tFV=PV×(1+r)t

Where:

● FVFV is the future value (future living expenses)

● PVPV is the present value (current living expenses, $25,000)
● rr is the annual inflation rate (4% or 0.04)
● tt is the number of years (20 years)

Plugging in the values:

FV=25000×(1+0.04)20FV=25000×(1+0.04)20

Calculation Steps

1. Calculate (1+r)(1+r): 1+0.04=1.041+0.04=1.04

2. Raise this value to the power of tt: 1.04201.0420
3. Multiply the result by PVPV: FV=25000×(1.04)20FV=25000×(1.04)20