The solution to this problem requires time value of money calculations.Reference to Tables 9-1 through 9-4 in the text is necessary to complete the calculations.
-
If Vito has $5,000 per year to invest for ten years and wants to accumulate $87,745 at the end of that time,he must find an investment that is earning at a rate of
A)15%.
B)12%.
C)11%.
D)6%.

Question

The solution to this problem requires time value of money calculations.Reference to Tables 9-1 through 9-4 in the text is necessary to complete the calculations.  
-
If Vito has $5,000 per year to invest for ten years and wants to accumulate $87,745 at the end of that time,he must find an investment that is earning at a rate of
A)15%.
B)12%.
C)11%.
D)6%.

Quizplus · Accepted Answer

To determine the required annual rate of return, we need to use the future value of an annuity formula:

FV = PMT x (((1 + r)^n) - 1) / r

Where:
FV = Future Value
PMT = Annual payment (in this case, $5,000)
r = Annual interest rate (unknown)
n = Number of periods (in this case, 10 years)

By substituting the given values, we get:

$87,745 = $5,000 x (((1 + r)^10) - 1) / r

Solving for r using financial calculator or using present value interest factor of an annuity from Table 9-2, the annual rate of return is approximately 12%. Therefore, B) 12% is the best choice.

The Solution to This Problem Requires Time Value of Money