Trying to do finance homework, can anyone tell me if I'm right?

Discussion in 'Random Ramblings' started by chicken_china_mom, Aug 26, 2010.

  1. chicken_china_mom

    chicken_china_mom Crazy for Cochins

    Apr 24, 2009
    Tab, Indiana
    Ok, this is my first week in this finance class. It's week 1 of 5. Anyway, I've been going over the assignments for most of the week now, and I'm fuzzy on if I'm reading the assignment right, or if my brain is just doing overtime and I'm making things more complicated than I should. I've attempted the first two parts of the assignment, though I'm not sure I did them right, and I was hoping that someone who is better in math, and has a better grasp on finance than me, can tell if I'm doing this right. Ok, so here is the first part of the first assignment:

    After a protracted legal case, Joe won a settlement that will pay him $11,000 each year at the end of the year for the next ten years. If the market interest rates are currently 5%, exactly how much should the court invest today, assuming end of year payments, so there will be nothing left in the account after the final payment is made?

    Ok, at first I thought to take that initial $11,000 and times it by 5%. That gives me $11,500. Now, do I take that $11,500 and times THAT by 5%, and then continue on like this for the full ten years, at which time I have calculated a total of $145,274.71, or do I just take each year as if it's a new $11,000 and tack on the 5% so that at the end I have $115,500? Was I right to tack on the compounded interest?

    Next, for the second part of the first assignment, here is the problem:
    Mary just deposited $33,000 in an account paying 7% interest. She plans to leave the money in this account for eight years. How much will she have in the account at the end of the seventh year?

    My question here is, do I add that 7% on to the first year, even though I don't know what time of year she deposited the money? And do I tack it on at the end? Right now, the answer I am sitting with is $49,312.14, and that's assuming that I don't have to add the 7% on to the first year. If I do, clearly I'll have to recalculate the entire total. Am I thinking too hard on this? Am I anywhere in the right ballpark? I'm planning to e-mail my teacher on this too, but it could be days before I hear back, and I have 4 other assignments to finish. Any advice would be MUCH appreciated. Thanks!
     
    Last edited: Aug 26, 2010
  2. Cindiloohoo

    Cindiloohoo Quiet as a Church Mouse

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    Dec 19, 2009
    Southwest TN
    First part...the court needs to invest what WILL BECOME 11,000 by the END of the year...so there should be some subtracting. Figure the 5% and subtract that ammount from 11,000...this is what will need to be "invested" by the court each year.

    Second part...Mary's 33,000 will sit for 8 years. I'd add the percentage onto the first year...doesn't matter when she opened the account, a year from open date is still a year if it was Jan. 1st or July 12th.

    1st year 33,000 plus 7 is 33,000 plus 2,310 which equals 35,310
    2nd year 35,310 plus 7....and so on till year 7because the interest deposits yearly. Do ya get what I mean? Clear as mud eh... [​IMG]
     
  3. chicken_china_mom

    chicken_china_mom Crazy for Cochins

    Apr 24, 2009
    Tab, Indiana
    Quote:I do actually for the second part, but on the first part with Joe, it says he's to get $11,000 plus the 5% at the end of each year for 10 years. It seemed right to add the compounded interest onto that. Here is that part again, just so you can understand what I'm saying (cause I'm tired, and I'm not 100% sure I'm making sense since it's nearly 3am here, lol):

    After a protracted legal case, Joe won a settlement that will pay him $11,000 *each year* at the end of the year *for the next ten years*. If the market interest rates are currently 5%, exactly how much should the court invest today, assuming end of year payments, so there will be nothing left in the account after the final payment is made?
     
  4. Cindiloohoo

    Cindiloohoo Quiet as a Church Mouse

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    I reread that first one and missed that they are "investing a lump sum... [​IMG]
    Ok, 11,000 per year for 10 years is 110,000. Now we have to figure the "investment" which will be lower because the money will grow over time. Consulting my Dave Ramsey book...it's a GODSEND with stuff like this!!!!! I recommend buying it for this class...everything you need to know finance will be in it...including formulas to figure this stuff that makes my brain mush when I'm tired [​IMG]

    BRB.........

    ETA: I read that to say the court will put X ammount in that will grow into 11,000 payment at the end of each year NOT 11,000 PLUS 5%, right? Words and numbers words and numbers LOL!
     
    Last edited: Aug 26, 2010
  5. chicken_china_mom

    chicken_china_mom Crazy for Cochins

    Apr 24, 2009
    Tab, Indiana
    Quote:So if it's that way, then the court would need to invest $10,450 each year for ten years? Am I understanding that right? I think my brain is jello right now, lol!
     
  6. chicken_china_mom

    chicken_china_mom Crazy for Cochins

    Apr 24, 2009
    Tab, Indiana
    Which would make for $104,500 total to deposit into the account. This money would then accrue the 5% interest and basically end up being $115,500. Right?
     
  7. Cindiloohoo

    Cindiloohoo Quiet as a Church Mouse

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    [​IMG] i'm no good at this without the BOOK and I can't find it! [​IMG] Lemme give you a link to a good financial calculator. Use the loan calculators to figure in the 5% for 10 years to get 110,000.

    here ya go https://www.centralbanksavannah.com/f_calculators.htm

    I LOVE this banks calculators!!!!
     
  8. Cindiloohoo

    Cindiloohoo Quiet as a Church Mouse

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    To me it sounds like they want to invest all the money up front that will accrue the 5% interest over 10 years to pay out 110,000 by the end of the tenth year. SO MANY VARIABLES, because the principle will go down each year, thus making the accrued interest go down...that site has an ammortizing calculator and I think that may be what you need. UGH! Wish I could help more...just so TIRED..lol!!! MUST be frustrating for you as well. The Dave Ramsey book will be a HUGE help in understanding this stuff, it explains in great detail in the "planning for college" section of the book...THAT is the perfect formula for this, but dangit I can't find it!!!!!!! Is this due tomorrow? If not, I will look that book up and you can PM me your addy and I could maybe overnight it to ya, and you can media mail it back when you are done. You'd ACE this class with that! Maybe another BYC'er will happen along who knows what I am talking about here...lol!
     
  9. chicken_china_mom

    chicken_china_mom Crazy for Cochins

    Apr 24, 2009
    Tab, Indiana
    Oooh, a calculator, thank you! I'll take any help I can get! Thanks for trying. I'm tired, gonna go rest my brain and then try again in the morning. My brain is fried tonight! I'll play with the calculator tomorrow. I have an eerie feeling it will come in VERY handy!
     
  10. Cindiloohoo

    Cindiloohoo Quiet as a Church Mouse

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    Quote:That's the right track but something is off...and I think it is the variable I mentioned in the above post about how the principle goes down yearly when he recieves a payment therefore accruing less interest than the year before... It HAS to end up an empty account after all payments have been made so 115,500 would not cut it...it has to be less than 104,500 invested initially...
     

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