Using the following table as an example:

1.

a) What will be the interest earned if the ROR is only 6%? 4%? 2%?

b) Assume again an 8% ROR, what is the interest earned if EOY 3 cash flow increases to $400,000? What is the interest if EOY 4 also increases to $400,000?

2.

If you were to invest $2000 today in a CD paying 8% per year, how much would the CD be worth at the end of year four?

a) Assuming simple interest

b) Assuming compound interest

3.

How much would you need to invest today in a CD paying 5% if you needed $2000 four years from today?

a) Assuming simple interest

b) Assuming compound interest

Rate of Return 8.00% Simple Interest Compound Interest End of year EOY Cumulative equivalent Cumulative equivalent EOY cash flow Interest Earned Interest Earned during year Cash Flow S0 1$200,000 2 $200,000 3 $300,000 4$300,000 EOY cash flow $0 $200,000 $416,000 $748,000 $1,104,000 during vear $0 $16,000 $32,000 $56,000 $104,000 $0 $16,000 $33,280 $59,942 $109,222 $0 $200,000 $416,000 $749,280 $1,109,222 Total