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Time Value of Money exercises- Instructor

# Time Value of Money exercises- Instructor - Time Value of...

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Time Value of Money exercises: 1. Use future of present value techniques to solve the following problems A. Starting with \$10,000, how much will you have in 10 years if you can earn 15 % on your money? If you can earn only 8%? At the end of 10 years, your \$10,000 investment would grow to \$40,460 at 15%, but only \$21,590 at 8% (about half as much). FV = PV x FV factor 15%,10 yrs. 10000 +/- PV = \$10,000 x 4.406 15 I = \$40,460 10 N FV \$40,455.58 FV = PV x FV factor 8%,10yrs. 10000 +/- PV = \$10,000 x 2.159 8 I = \$21,590 10 N FV \$21,589.25 B : If you inherited \$25,000 today and invested all of it in a security that paid a 10% rate of return, how much would you have in 25 years? At the end of 25 years, your \$25,000 investment would grow to \$270,850 at a 10% return. FV = PV x FV factor 10%,25yrs. 25000 +/- PV = \$25,000 x 10.834 10 I = \$270,850 25 N FV \$270,867.65 C : If the average new home costs \$125,000 today, how much will it cost in 10 years if the price increases by 5% each year? At the end of 10 years the average new home, which costs \$125,000 today, will cost \$203,625 if prices go up at 5% per year. FV = PV x FV factor 5%,10yrs. 125000 +/- PV = \$125,000 x 1.629 5 I = \$203,625 10 N FV \$203,611.83

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D: You think that in 15 years it will cost \$75,000 to give your child a college education. Will you have enough today if you take \$25,000 today and invest it for the next 15 years 8%? If you start from scratch, how much will you have to save each year to have \$75,000 in 15 years if you can earn an 8% return on your investments?
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