Question Calculate the FV of your pension plan Present Value Present value

# Question calculate the fv of your pension plan

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Question: Calculate the FV of your pension plan Present Value Present value reflects the current value of a future payment or receipt. PV = FVn {1/(1 + r ) n } ¨ FVn = the future value of the investment at the end of n years ¨ n = number of years until payment is received ¨ r = the interest rate ¨ PV = the present value of the future sum of money PV example ¨ What will be the present value of 500 to be received 10 years from today if the discount rate is 6%? ¨ PV = 500 x {1/(1+0.06) 10 } = 500 x (1/1.791) = 500 x (0.558) = 279.00  Net Present Value Calculation Definition: Present Value is the value of an expected income stream determined as of the date of valuation. (how to calculate it in Excel) Basic notion: ¨ “An EUR today has a higher value than an EUR tomorrow”. ¨ The time value of money describes the greater benefit of receiving money now rather than later . Customer Lifetime Value Definition: The CLV is one application of the NPV calculation. The CLV is is a prediction of the discounted net profits attributed to the entire future relationship with a customer. Thus, the CLV is the NPV of each customer. The CLV is a long-term concept. It motivates firms to retain clients and to increase their “share-of-wallet”. The value of a firm might be calculated multiplying the CLV with the number of clients. Annuity ¨ An annuity is a series of equal dollar payments for a specified number of years. ¨ Ordinary annuity payments occur at the end of each period. FV of Annuity Compound Annuity ¨ Depositing or investing an equal sum of money at the end of each year for a certain number of years and allowing it to grow. FV Annuity - Example ¨ What will be the FV of a 5-year, 500 annuity compounded at 6%? ¨ FV 5 = 500 (1 + 0.06) 4 + 500 (1 + 0.06) 3 + 500(1 + 0.06) 2 + 500 (1 + 0.06) + 500 = 500 (1.262) + 500 (1.191) + 500 (1.124) + 500 (1.090) + 500 = 631.00 + 595.50 + 562.00 + 530.00 + 500 = 2,818.50  FV of an Annuity – Using the Mathematical Formulas FV n = PMT {(1 + r ) n 1/ r } ¨ FV n = the future of an annuity at the end of the nth year ¨ PMT = the annuity payment deposited or received at the end of each year ¨ r = the annual interest (or discount) rate ¨ n = the number of years ¨ What will 500 deposited in the bank every year for 5 years at 6% be worth? ¨ FV = PMT {[(1 + r ) n – 1]/ r } = 500 (5.637) = 2,818.50 FV of an Annuity – Using the Mathematical Formulas FV of Annuity: Changing PMT, N, and r 1. What will 5,000 deposited annually for 50 years be worth at 7%? FV = 2,032,644 Contribution = 250,000 (= 5000*50) 2. Change PMT = 6,000 for 50 years at 7% FV = 2,439,173 Contribution= 300,000 (= 6000*50) FV of Annuity: Changing PMT, N, and r 3. Change time = 60 years, 6,000 at 7% FV = 4,881,122 Contribution = 360,000 (= 6000*60) 4. Change r = 9%, 60 years, \$6,000 FV = 11,668,753 Contribution = 360,000 (= 6000*60) Present Value of an Annuity Pensions, insurance obligations, and interest owed on bonds are all annuities. To compare these three types of investments we need to know the present value ( PV ) of each.  PV of Annuity – Using the Mathematical Formulas ¨ PV of Annuity = PMT {[1 – (1 + r ) –1 ]}/ r = 500 (4.212) = 2,106 PV of Annuity – Example Pricing Models EA Compare the following three pricing models and decide, which one  #### You've reached the end of your free preview.

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