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

Chapter 4 - Assignment ExampleThe correct answer is (c), to break up 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 one-year interest rate will be, rR = (1 + (0.065/12))12 = 1.067, while for the Midwest Bank, the effective yearly 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 Eds trust, first we calculate the integrality 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 bite 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 1.097 + $5,000 x 1.096 + $5,000 x 1.095 + $5,000 x1.094 =$32,276.7, the total will be = $59,696.76At t=11, the amount of $8,103.14, will have a dearth 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 (1.093), A =