lecture_chap05_06A

Answer 1586 b how much would you have using simple

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Unformatted text preview: nits • Calculator Approach •5N • 15 I/Y • 3,000,000 PV • CPT FV = -6,034,072 units Workshop #1 • Suppose you have $500 to invest and you believe that you can earn 8% per year over the next 15 years. a) How much would you have at the end of 15 years using compound interest? Answer = 1,586. b) How much would you have using simple interest? Answer = 1,100 Present Values – 5.2 • How much do I have to invest today to have some specified amount in the future? • FV = PV(1 + r)t • Rearrange to solve for PV = FV / (1 + r)t • Terminology: Discouting means finding the present value of some future amount. • Remember that there are four main calculator buttons: FV, PV, I and N. Previously we were computing for FV. Now we’re computing for PV. Present Value – One Period Example • Suppose you need $10,000 in one year for the down payment on a new car. If you can earn 7% annually, how much do you need to invest today? • Formula Approach • PV = 10,000 / (1.07)1 = 9345.79 • Calculator Approach • • • • 1N 7 I/Y 10,000 FV CPT PV = -9345.79 Present Value – Example 2 • You want to begin saving for your daughter’s college education and you estimate that she will need $150,000 in 17 years. If you feel confident that you can earn 8% per year, how much do you need to invest today? • Formula Approach • PV = 150,000 / (1.08)17 = 40,540.34 • Calculator Approach • N = 17 • I/Y = 8 • FV = 150,000 • CPT PV = -40,540.34 Present Value – Example 3 • Your parents set up a trust fund for you 10 years ago that is now worth $19,671.51. If the fund earned 7% per year, how much did your parents invest? • Formula Approach • PV = 19,671.51 / (1.07)10 = 10,000 • Calculator Approach • • • • N = 10 I/Y = 7 FV = 19,671.51 CPT PV = -10,000 Present Value – Important Relationship I • For a given interest rate – the longer the time period, the lower the present value • What is the present value of $500 to be received in 5 years? 10 years? The discount rate is 10%. Important Relationship I continued • Formula Approach • 5 years: PV = 500 / (1.1)5 = 310.46 • 10 years: PV = 500 / (1.1)10 = 192.77 • Calculator Appro...
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This document was uploaded on 02/06/2014.

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