Solution Manual for Focus on Personal Finance 12th Edition by Jack Kapoor, Les Dlabay, Robert J. Hughes & Melissa Hart Chapter 1-19

Solution Manual for Focus on Personal Finance 12th Edition by Jack Kapoor, Les Dlabay, Robert J. Hughes & Melissa Hart Chapter 1-19

Chapter 1 Problems

• Calculating the Future Value of Property. Ben Collins plans to buy a house for $220,000. If that

real estate is expected to increase in value 3 percent each year, what would its approximate value be seven years from now?

Solution: $220,000  1.230 = $270,600

LO: 1-2

Topic: Future value

LOD: Intermediate

Bloom tag: Apply

2. Using the Rule of 72. Using the rule of 72, approximate the following:

• If land in an area is increasing 6 percent a year, how long will it take for property values to

double?

• If you earn 10 percent on your investments, how long would it take for your money to double?
• At an annual interest rate of 5 percent, how long would it take for your savings to double?

Solution: a. about 12 years (72/6)

• about 7.2 years (72/10)
• about 14.4 years (72/5)

LO: 1-2

Topic: Time value of money – number of periods

LOD: Basic

Bloom tag: Apply

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• Determining the Inflation Rate. In 2006, selected new automobiles had an average cost of

$16,000. The average cost of those same motor vehicles is now $28,000. What was the rate of increase for this item between the two time periods?

Solution: ($28,000 – $16,000) / $16,000 = .75 (75 percent)

LO: 1-2

Topic: Time value of money – interest rates and inflation

LOD: Intermediate

Bloom tag: Apply

• Computing Future Living Expenses. A family spends $48,000 a year for living expenses. If prices

increase by 2 percent a year for the next three years, what amount will the family need for its living expenses?

Solution: $48,000  1.061 = $50,928 (Future value of single amount for 3 years at 2 percent)

LO: 1-2

Topic: Future value

LOD: Basic

Bloom tag: Apply

• Calculating Earnings on Savings. What would be the yearly earnings for a person with $8,000 in

savings at an annual interest rate of 2.5 percent?

Solution: $8,000  .025 = $200

LO: 1-4

Topic: Time value of money – interest rates and inflation

LOD: Basic

Bloom tag: Apply

7-3 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill

• Computing the Time Value of Money. Using time value of money tables, calculate the following:
• The future value of $450 six years from now at 7 percent.
• The future value of $900 saved each year for 10 years at 8 percent.
• The amount that a person would have to deposit today (present value) at a 6 percent interest

rate in order to have $1,000 five years from now.

• The amount that a person would have to deposit today in order to be able to take out $600 a

year for 10 years from an account earning 8 percent.

Solution: a. $450  1.501 = $675.45

• $900  14.487 = $13,038.30
• $1,000  0.747 = $747
• $600  6.710 = $4,026

LO: 1-4

Topic: Present value

LOD: Intermediate

Bloom tag: Apply

• Calculating the Future Value of a Series of Amounts. Elaine Romberg prepares her own income

tax return each year. A tax preparer would charge her $80 for this service. Over a period of 10 years, how much does Elaine gain from preparing her own tax return. Assume she earn 3 percent on her savings.

Solution: $80  11.464 = $917.12

LO: 1-4

Topic: Future value

LOD: Advanced

Bloom tag: Apply

• Calculating the Time Value of Money for Savings Goals. If you desire to have $20,000 for a down

payment for a house in five years, what amount would you need to deposit today? Assume that your money will earn 5 percent.

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Solution: $20,000 x 0.784 (present value of single amount) = $15,680.

LO: 1-4

Topic: Present value

LOD: Intermediate

Bloom tag: Apply

• Calculating the Present Value of a Series. Pete Morton is planning to go to graduate school in a

program of study that will take three years. Pete wants to have $15,000 available each year for various school and living expenses. If he earns 4 percent on his money, how much must he deposit at the start of his studies to be able to withdraw $15,000 a year for three years?

Solution: $15,000 x 2.775 (present value of a series) = $41,625

LO: 1-4

Topic: Present Value

LOD: Advanced

Bloom tag: Apply

• Using the Time Value of Money for Retirement Planning. Carla Lopez deposits $3,200 a year into

her retirement account. If these funds have an average earning of 9 percent over the 40 years until her retirement, what will be the value of her retirement account?

Solution: $3,200 x 337.890 (future value of a series) = $1,081,248

LO: 1-4

Topic: Future value

LOD: Intermediate

Bloom tag: Apply

• Calculating the Value of Reduced Spending. If a person spends $15 a week on coffee (assume

$750 a year), what would be the future value of that amount over 10 years if the funds were deposited in an account earning 3 percent?