You are hoping to buy a house in the

future and recently received an

inheritance of $16,000. You...
Question:
You are hoping to buy a house in the future and recently received an inheritance
of $16,000.

You intend to use your inheritance as a down payment on your house.

a. If you put your inheritance in an account that earns 8 percent interest

compounded annually, how many years will it be before your inheritance grows
to $34,000?

b. If you let your money grow for 9.5 years at 8 percent, how much will you have?

c. How long will it take your money to grow to $34 ,000, if you move it into an
account that pays 4 percent compounded annually?

How long will it take your money to grow to $34,000, if you move it into an
account that pays 11% ?

d. What does all this tell you about the relationship among interest rates, time,
and future sums.

(please round all the answer to one decimal.)

Future Value:
Future value refers to the expected future sum of the money-earning a specified
interest rate in the future. The future value of money has a direct relationship
with the interest rates, which at a higher interest rate would result in higher
future value and vice versa.

Answer and Explanation:

Question (a)
Formula in calculating the total number of periods:

{eq}Period=\dfrac{ln \bigg(\frac{FV}{PV}\bigg)}{ln (1+r)}\\ where:\\

ln=logarithmic~number\\ FV=future~value\\ PV=present~value\\ r=interest~rate\\
{/eq}
{eq}\begin{align*} Period&=\dfrac{ln \bigg(\frac{34,000}{16,000}\bigg)}{ln (1+.08)}\\
&=\dfrac{ln(2.1250)}{ln(1.08)}\\ &=\dfrac{.7538}{.0770}\\ &=9.79 \end{align*} {/eq}

It would take 9.79 years, for the deposited $16,000 to grow to $34,000 earning
8% annually

Question (b)
Formula on calculating the future value:

{eq}FV=PV*(1+r)^{n}\\ where:\\ PV=present~value\\ r=interest~rate\\

n=number~of~periods\\ {/eq}

{eq}\begin{align*} FV&=16,000*(1+.08)^{9.5}\\ &=16,000*2.0774\\ &=33,238.92

\end{align*} {/eq}

The money would grow to $33,238.92, if invested in account earnings 8% for 9.5
years

Question (c)
Using similar formula on Question (a)

{eq}\begin{align*} Period&=\dfrac{ln \bigg(\frac{34,000}{16,000}\bigg)}{ln (1+.04)}\\

&=\dfrac{ln(2.1250)}{ln(1.04)}\\ &=\dfrac{.7538}{.0392}\\ &=19.22 \end{align*} {/eq}

It would take 19.22 years, for the deposited $16,000 to grow to $34,000 earning
4% annually

{eq}\begin{align*} Period&=\dfrac{ln \bigg(\frac{34,000}{16,000}\bigg)}{ln (1+.11)}\\

&=\dfrac{ln(2.1250)}{ln(1.11)}\\ &=\dfrac{.7538}{.1044}\\ &=7.22 \end{align*} {/eq}

It would take 7.22 years, for the deposited $16,000 to grow to $34,000 earning
11% annually

Question (d)
Based on the results, the number of periods to reach the future value are lesser
with higher interest rates and vice versa, it would take a higher number of
periods for account earnings lower interest rates to accumulate its desired
future value. In other words, the interest rates and a number of periods have an
inverse relationship, which means that higher interest rates would have a lower
number of periods to earned the target future sums and vice versa.