AGRICULTURAL ECONOMICS 330 Assignment 1 Instructor Dr David J Leatham Key Suppose you deposit 2 500 today in a savings account at 3 5 interest compounded annually Assuming no withdrawal how much would you have at the end of 10 years A 3 526 B 1 772 C 29 328 D 20 792 0 2 500 10 V 10 r 3 5 V10 2500 1 035 10 3 526 50 Suppose you owe a creditor 10 000 due in a single payment in 5 years How much should your creditor be willing to accept now if he can earn 8 on his money A 14 693 B 39927 C 6 806 D 58 666 About how many years will it take for 100 000 placed in a bank account at 7 interest rate compounded annually to double Answer 10 24 years 0 0V 5 10 000 r 8 V0 10 000 1 08 5 6 805 83 A 8 63 years B 10 24 years C 10 months D 5 44 years 0 100 000 N 200 000 r 7 200 000 100 000 1 0 07 N 1 2 3 What is the approximate annual interest rate compounded annually if your money will double in 8 years if it is put in a savings account Assume you borrow 25 000 at 8 per year interest compounded annually You pay nothing until the end of 10 years at which time the principal and interest is due 5 1 What will be the total amount of repayment principal and interest at the end of the 10th year In this problem you only make one payment it is at the end of the 10th year N 10 24 years A 8 B 4 C 200 D 9 0 1 8 2 r 2 1 1 r 8 9 r A 3 725 B 45 000 C 53 973 12 D 50 000 5 2 A 53 973 B 28 973 C 20 000 D 25 000 0 25 000 10 V 10 r 8 V10 25 000 1 08 10 53 973 12 How much interest is paid 4 5 6 53 973 12 25 000 28 973 12 If you borrow 25 000 at 8 interest and pay only the interest at the end of each year what is the total amount of principal and interest simply add it up over 10 years counting the 25 000 principal which must be repaid at the end of the 10th year A 45 000 B 2 000 C 20 000 D 28 973 7 Interest year 25 000 08 2 000 Total Interest 2 000 10 20 000 Total Principal Interest 25 000 20 000 45 000 Does it make any sense to compare the total undiscounted principal and interest on the loans from questions 5 6 Should you prefer the loan with the smallest total payment Explain A Yes because you always want to a loan that pays the least interest B No because the time value of money was ignored in question 6 C Yes because in both cases the principal and interest are included D A and C above are correct No answers to 5 and 6 should not be compared Dollars in different time periods were added together to get totals Time value of money adjustments need to be made Also to choose the loan you prefer your financial condition and the particular investment opportunity must be considered