Sundara read about situations involving money, interest rates, and time periods. She analyzed four cases:
1) Manhattan was bought in 1626 for $24 and would be worth $132 million today at 6% interest.
2) Saving $2,000 annually at 6% interest for 10 years from age 22 would yield $241,320 by age 70.
3) Investing $2 million in 1945 at a 15% annual return would be worth $17.6 billion today.
4) A $200 one-week loan at 15% weekly interest equates to 780% annual simple interest or 143,213% compound interest.
Sundara read about situations involving money, interest rates, and time periods. She analyzed four cases:
1) Manhattan was bought in 1626 for $24 and would be worth $132 million today at 6% interest.
2) Saving $2,000 annually at 6% interest for 10 years from age 22 would yield $241,320 by age 70.
3) Investing $2 million in 1945 at a 15% annual return would be worth $17.6 billion today.
4) A $200 one-week loan at 15% weekly interest equates to 780% annual simple interest or 143,213% compound interest.
Sundara read about situations involving money, interest rates, and time periods. She analyzed four cases:
1) Manhattan was bought in 1626 for $24 and would be worth $132 million today at 6% interest.
2) Saving $2,000 annually at 6% interest for 10 years from age 22 would yield $241,320 by age 70.
3) Investing $2 million in 1945 at a 15% annual return would be worth $17.6 billion today.
4) A $200 one-week loan at 15% weekly interest equates to 780% annual simple interest or 143,213% compound interest.
Sundara read about situations involving money, interest rates, and time periods. She analyzed four cases:
1) Manhattan was bought in 1626 for $24 and would be worth $132 million today at 6% interest.
2) Saving $2,000 annually at 6% interest for 10 years from age 22 would yield $241,320 by age 70.
3) Investing $2 million in 1945 at a 15% annual return would be worth $17.6 billion today.
4) A $200 one-week loan at 15% weekly interest equates to 780% annual simple interest or 143,213% compound interest.
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Case Study 1 - Time Marches On, So Does the Interest Rate
Background During the last week, Sundara has read about different situations that involve money, interest rate, and different amounts of time. She has gotten interested in the major effects that time and interest rates have on the amount of money necessary to do things and the significant growth in the amount of money when a large number of years are considered. In all cases, the interest focuses on the amount of money at the end of the time period.
Information The four situations are described here.
A. Manhattan Island was purchased in 1626 for $24. After 385 years in 2011, at 6% per year compounded interest, the current value must be very large. B. At the age of 22, if she saved only $2000 per year for the next 10 years (starting next year) and made a return of 6% per year, by today’s standards, she would have accumulated a nice sum at the age of 70. C. A corporation invested $2 million in developing and marketing a new product in 1945 (just after World War II, this was a lot of money) and has made a steady net cash flow of $300,000 per year for some 65 years. Sundara estimated the annual rate of return must be quite good, especially given that she is lucky to earn 4% per year on her own investments these days. D. A friend who is not good with money, went to a pawn shop and borrowed $200 for one week and paid $30 in interest. Sundara thought this might be a pretty good deal, in case she ever ran low on cash. However, she did not know whether the interest was simple or compounded monthly, and how much may be owed were this loan not paid off for 1 year.
Case Study Exercises
1. What is the annual interest rate for each situation? Include both the annual simple and the compound rates for situation D. 2. Calculate and observe the total amount of money involved in each situation at the end of the time periods compared to the starting amount. Is the ending amount larger or smaller than you would expect it to be prior to making any computations? 3. Think of a situation for yourself that may be similar to any of those above. Determine the interest rate, the time period, and the starting and ending amounts of money. 1. What is the annual interest rate for each situation? Include both the annual simple and the compound rates for situation D. SITUATION INTEREST RATE A 6% per year B 6% per year C 15% per year D Simple: 780% per year Compound: 143,213% per year
SITUATION C: 2,000,000 = 300,000(P/A, i%, 65) (P/A, i%, 65) = 6.67 i = 15% SITUATION D: 30/200 = 15% per week Simple: 15%(52 weeks) = 780% per year Compound: (1.15)^52 – 1 = 142,213 per year
2. Calculate and observe the total amount of money involved in each situation at the end of the time periods compared to the starting amount. Is the ending amount larger or smaller than you would expect it to be prior to making any computations? SITUATION A: GIVEN: P= 24 i= 6% per year n= 385 years F= 24(1.06)^385 = 132,730,083,800 SITUTION B: GIVEN: A= 2,000 per year i= 6% per year n= 10 years at age 32 F at age 32= 2,000(F/A, 6%, 10) = 26,361.60 F at age 70= 26,361.60(F/P, 6%, 38) = 241,320 SITUATION C: GIVEN: A= 300,000 i= 15% per year n= 65 years F= 300,000(F/A, 15%, 65) = 17.6 billion SITUATION D: SIMPLE INTEREST GIVEN: P= 200 F= (0.15)(12)(200) + 200 = 1760 COMPOUND INTEREST F= 200(1.15)^52 = 286,627
3. Think of a situation for yourself that may be similar to any of those above. Determine the interest rate, the time period, and the starting and ending amounts of money. I borrow money worth 10,000 that has an interest rate of 10% per month and needed to pay within 2 years. How much should I pay every week? GIVEN: F= 10,000 i= 10% per month n= 2 years or 24 months A= 10,000(A/F, 10%, 24) = 112.997 OR 113 per month
