CSM404 Module 3

CSM404 Module 3 - TVM TVM TVM Future Value of $1 What is the future value of a lump sum You have $1000 and you put it away You for 5 years at a 10

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Unformatted text preview: TVM TVM TVM Future Value of $1 What is the future value of a lump sum? You have $1000 and you put it away You for 5 years at a 10% annual return. Calculate the amount you will have. You have $300 and you put it away You for 30 years at a 5% return. Calculate the amount you will have. Compounding – interest earned on Compounding principal & previously earned interest -1000 PV 10 I TVM TVM 5N 0 PMT CPT FV= Page 1 of 7 TVM A saver places $1000 in a CD that matures in 20 yrs. earning 4% interest, compounded annually. How much will saver earn if How interest is left to accumulate? -1000 PV 20 N 4I 0 PMT CPT FV= How much interest will saver How interest earn if interest is withdrawn each year? TVM TVM Present Value of $1 What is the present value of a future lump sum? Discounting – process of Discounting determining present value FV= I= N= PMT= CPT PV= Our CD is earning 10% interest Our & matures in 5 years for $100. What is it currently worth? TVM TVM Page 2 of 7 TVM Future Sum of an Annuity Annuity – series of equal annual pyts. Annuity pyts. Ordinary annuity – end of year Ordinary Annuity due – beginning of year Annuity If we make $100 pyt. for next 3 yrs. earning If pyt. 5% interest what is future value? Ordinary annuity PMT= N= I= PV= CPT FV= Annuity Due (2nd BGN) PMT= N= I= PV= CPT FV= TVM TVM At the end of each year a self-employed person At selfdeposits $1500 in account that earns 10% annually. How much will be in account when person retires at age 65 if savings program starts when person is age 45? PMT = I= N= PV= CPT FV= How much additional $ will be in account if saver How defers retirement until age 70 yet continues contributions? PMT= I= N= PV= CPT FV= How much additional $ will be in account if saver How discontinues contributions but doesn’t retire until age doesn’ 70? PV= I= N= PMT= CPT FV= TVM TVM Page 3 of 7 TVM Practice for you A saver wants $100,000 after 10 saver years and believes it is possible to earn 8% annually on invested funds. What amount must be invested each year to accumulate $100,000 if (1) annuity due (2) ordinary annuity? TVM TVM Answers Annuity due: 2nd BGN; 100,000 FV; 10 N; 0 PV; 8 I; CPT PMT = 6,391 Ordinary annuity: 100,000 FV; 10 N; 0 PV 8 I; CPT PMT = 6,903 Present Value of an annuity What is the present value of a series of future equal payments? Value depends on whether pyts. Received Value pyts. at beginning or end of time period. What is present value of annuity of $100 What received for 3 yrs. w/interest rate 12%? Annuity due (2nd BGN) PMT= FV= I= N= CPT PV= Ordinary annuity PMT =FV= I= N= CPT PV= =FV= TVM TVM Page 4 of 7 TVM Practice for you Investment offers $10,000 per Investment year for 20 years. If an investor can earn 8% annually elsewhere, what is the current value of this investment? PMT= N= I= FV= CPT PV= If its current price is $120,000 If should investor buy it? TVM TVM Answer 10,000 PMT; 20 N; 8 I; 0 FV; CPT PV = 98,181 so no, you wouldn’t pay 120k for something worth far less Practice for you A person retiring at age 65 has person $200,000 and wants to leave $30,000 estate. How much can person draw annually on $200,000 (starting at end of year) if funds earn 8% and life expectancy is age 85? PV= FV= N= I= CPT PMT= TVM TVM Answer 200,000 PV; 30,000 FV; 20 N; 8 I; CPT PMT = 19,715 Page 5 of 7 TVM See self-assessment for answer. Practice for You An investor bought a stock 10 years ago for $20 and sold it today for $35. What is rate of return on investment? PV= 20 FV= 35 PMT= 0 N= 10 CPT I= TVM TVM See self-assessment for answer. Practice for You Graduating seniors may earn Graduating $35,000 each year. If the annual rate of inflation is 4%, what must graduates earn after 20 years to maintain their current purchasing power? If the rate of inflation rises to 7% will If they be maintaining their standard of living if they earn $150,000 after 20 years? PV= PMT= N= I= CPT FV= TVM TVM Page 6 of 7 TVM Don’t forget that not all calculations are annual!!! Semi Semi Quarterly Quarterly Monthly Monthly To adjust interest rate to find To rate per time divide stated interest rate by # of periods or adjust setting on calculator. Must also adjust time periods. TVM TVM For example, if you finance a $20,000 car at 6% for 4 years what will be your monthly payment? 20,000 PV; 0 FV; 6/12 = I; 4*12=N; CPT PMT =$469.70. Or, suppose you contribute your $600 tax refund into an account. How much will you have after two years if you earn 3% compounded monthly (ignore taxes)? -600PV; 3/12=I; 2*12=N; 0PMT; CPT FV = $637. Work the calculator solutions peppered throughout the chapter. Page 7 of 7 ...
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This note was uploaded on 03/16/2010 for the course CSM 404 taught by Professor Pentecost during the Spring '10 term at Alabama.

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