Problem 11-123 [LO 11-S1] This problem comes from the Managerial Accounting Stac
ID: 2572636 • Letter: P
Question
Problem 11-123 [LO 11-S1]
This problem comes from the Managerial Accounting Stacy Whitecotten 3rd edition textbook
You want to invest $10,160 in a business opportunity. If you keep the money invested in the business for three years, you will receive $11,170 back. If you keep the money invested in the business for seven years, you will receive $13,070 back. Currently, the money is in your savings account, which earns 10% interest, compounded annually. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables.)
a. What is the future value of the money if it remains in your savings account for three years? (Round your answer to the nearest dollar amount.)
b. What is the future value of the money if it remains in your savings account for seven years? (Round your answer to the nearest dollar amount.)
c. Is it better to invest in the business for three years, seven years, or not at all? 3 years 7 years Not at all
Explanation / Answer
Future value of money = Present Value (1+rate)^no. of years
(a) Future value factor for 3 years @ 10 % = 1.331
This can be computed also as (1+ 10%)^3 or seen from PV table
Future value after 3 years if kept in saving account = $10,160 X 1.331 = $ 13,523 (rounded off)
(b) Future value factor for 7 years @ 10% = 1.9487
Future value after 7 years if kept in saving account = $10,160 X 1.9487 = $ 19,799
(c) It is better not to invest in business at all as future value in savings bank is more than business returns
Note: Kindly note that answer may vary very slightly due to future value factor. I have computed the factor as per formula. You may refer the same from table.