TVOM: Time Value of Money The value of any asset (investment) is determined by: 1) Return – the benefit from investing current incomevs. capital gainsincome 2) Time – how long you will have to wait to receive the return 3) Risk – the chance that you will not receive the expected return Valuation areas: 1.) Future Value of a Lump Sum (a single deposit) D1 - FVIF: Future Value Interest Factor Present Value --------> Future Value “compounding over time” Ex.) You invest $3000 into an account earning 5%. After 5 years, what has the account grown to?
Ex.) If you leave the $3000 in the account for 10 years, what would the account grow to?
-The “Rule of 72” shows how long it would take to double your money 72/interest rate = Number of years needed to Int. Rate double your money 72/# of years = Annual interest rate earned # of years Ex.) You invest $5000 at 8%, how long will it take to double your money?
Ex.) If your investment doubled in 6 years, what annual interest rate were you earning?
2) Future Value of an Annuity - an annuity is a series of equal payments (or benefits) made at equal time intervals D2
FVIFA: Future Value Interest Factor of an Annuity Ex.) You invest $5000 annually into your Roth IRA which is earning 8% annually. After 35 years, what is the balance of your IRA?
Ex.) What if you could earn 9% over the 40 years instead of 8%, what would your IRA balance be?
Any assumptions being made here?
3) Sinking Fund (FVIFA) D2Deposits that are needed to accumulate a future amount Ex.) You are planning on retiring in 40 years and would like to save an additional $2,500,000 in addition to your retirement savings. How much will you need to save annuallyearning 8% interest-in order to reach your goal?