HACE 3200 1nd Edition Lecture 7Outline of Last Lecture I. I. Time Value of MoneyII. Interest and Compound InterestIII. Future Value EquationIV. Present Value EquationOutline of Current Lecture I. Practice Problems for Present Value and Future Value- Practice Problems - 1/24/14Time 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= $33,105.88These 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= $43,770.493. 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= 5o Looking for Present Value PV= $747,258.175. Elisabeth graduated high school at age 18. Her grandparents gave her a check for $1,000when 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=5o Future Value= $1,104.086. 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=5o Future Value= $1,762.347. 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= 60o Future Value= $1,105.088. Now Charlie knows that his buddies Elisabeth, Sally and Robert have not earned as muchon 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 100o (1.02/1.0188)-1 x100- PV= 1000- I/Y= .1178 %- N=5o Future Value= $1,005. 909. 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 inheritancetoday? - 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=10o Present Value=