Problem 5-13 Calculating Interest Rates and Future Values [LO1, 3] In 1895, the
ID: 2811442 • Letter: P
Question
Problem 5-13 Calculating Interest Rates and Future Values [LO1, 3] In 1895, the first Putting Green Championship was held. The winner's prize money was $160. In 2016, the winner's check was $1,400,000. o. What was the percentage increase per year in the winner's check over this iod? (Do not round intermediate calculations and enter your answer a rounded to 2 decimal places, e.g., 3216.) If the winner's prize increases at the same rate, what will it be in 2 b. 047? (Do not calculations and round your answer to 2 decimal places, e.g. 32.16.) a. Increase per year b. Winners prize in 2047Explanation / Answer
This question requires application of basic Time value of money function: FV = PV * (1 + r)n
a) Calculating rate of increase.
FV = $1,400,000
n = 2016 - 1895 = 121
PV = $160
1,400,000 = 160 * (1 + r)121
8750 = (1 + r)121
Taking 121th root of both sides
1 + r = 1.0779
r = 7.79% --> Answer to part 1
b) Calculating the prize money in 2047
PV = $1,400,000
r = 7.79%
n = 2047 - 2016 = 31
FV = ?
FV = 1400000 * (1 + 7.79%)31
FV = 1400000 * 10.2314
FV = $14,323,989.14