HACE 3200 1nd Edition Lecture 7 Outline of Last Lecture I I Time Value of Money II Interest and Compound Interest III Future Value Equation IV Present Value Equation Outline of Current Lecture I Practice Problems for Present Value and Future Value Practice Problems 1 24 14 Time Value of Money SINGLE PAYMENT Equation used in 1 can be applied for every problem Just interchange numbers according to what the problem is asking for 1 What is the future value of 500 if it is invested in an account for 30 years and earns an Annual Percentage Rate of 15 compounded annually PV 500 N 30 I Y 15 o Enter into financial calculator as follows 500 PV Enter 30 N Enter 15 I Y Enter Cmpt FV Enter Be sure to clear calculator after each problem Future Value 33 105 88 These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute 2 What is the future value of 500 if it is invested in an account for 30 years and earns an Annual Percentage Rate of 15 compounded monthly PV 500 N 30 x 12 must put number into months o 360 I Y 15 12 also put this number into months o Enter into calculator same as problem above FV 43 770 49 3 What is the inflation adjusted interest rate if the interest rate is 12 and the inflation rate is 3 5 1 i 1 r 1 x 100 Inflation adjusted interest rate o Perform that step first before proceeding to complete the problem 1 12 1 035 1 x 100 o 8 2126 4 What is the present value of 1 000 000 brought back from the future 5 years at a discount rate of 6 FV 1 000 000 I Y 6 N 5 o Looking for Present Value PV 747 258 17 5 Elisabeth graduated high school at age 18 Her grandparents gave her a check for 1 000 when she graduated She immediately deposited that check into a savings account at her bank The savings account earns an Annual Percentage Rate APR of 2 compounded annually Elisabeth has now graduated from college at age 23 Tomorrow she plans on withdrawing the financial gift from her grandparents as well as any compounded interest it has earned How much is in that savings account PV 1 000 I Y 2 N 5 o Future Value 1 104 08 6 Sally too received 1 000 from her grandparents after high school graduation at the age of 18 She also chose not to spend the windfall However Sally was more of a risk taker than was Elisabeth she invested her 1 000 in a certificate of deposit Her annual rate of return was 10 greater than Elisabeth s annual rate of return After graduating from ISU at age 23 cashed in her certificate of deposit How much was the CD worth when she cashed it in PV 1 000 I Y 12 N 5 o Future Value 1 762 34 7 Robert has always been money minded After graduating high school at age 18 he also had 1 000 to invest He also put his money into a savings account However his 2 Annual Percentage Rate has been compounded monthly Robert is now 23 How much has his 1 000 grown to be PV 1 000 I Y 2 12 to put into months 1667 N 5 x 12 60 o Future Value 1 105 08 8 Now Charlie knows that his buddies Elisabeth Sally and Robert have not earned as much on their 1 000 as they think He knows that inflation has deprived them of a portion of their interest Recalculate Elisabeth s windfall at withdrawal if inflation is running at 1 88 1 i 1 r 1 x 100 o 1 02 1 0188 1 x100 PV 1000 I Y 1178 N 5 o Future Value 1 005 90 9 Mike is due to receive his 500 000 inheritance when he turns age 30 However at age 25 he has grown impatient He wants the money now If his inheritance is earning an Annual Percentage Rate of 10 how much will Mike receive if he receives his inheritance today FV 500 000 N 5 I Y 10 o Present Value 310 460 66 Horacio has just realized that his life insurance policy has a cash value aspect He has been paying into it for 20 years His investment carries an Annual Percentage Rate of 8 If he leaves his cash value in the account for an additional 10 years it will be worth 5 000 However he is changing companies and wants to cash out his policy today What is the current cash value of his life insurance policy FV 5000 I Y 8 N 10 o Present Value 2315 96
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