DQ2 Week 4 Please respond to this discussion question by Saturday Day 5 Often in personal finance we want to know what our 1 investment today will be worth in 20 years In business however there is more concern with answering the question If I receive 100 in 5 years what is that worth today To answer this question modify the formula fv pv 1 i n and use the reciprocal Simply stated the reciprocal of a number is 1 divided by the number the reciprocal of 10 for example is 1 10 In the formula above we divide both sides by 1 i n which creates a new formula where the fv is multiplied by the reciprocal of the original fv 1 1 i n pv Select an interest rate and number of periods be sure your numbers are different from other students who already answered this question to calculate the present value of 100 received in the future What would the value of 100 in the future be today given the interest rate and number of periods you selected This calculation is simplified in Excel The following is an example of 10 interest paid annually and five year period n i fv pv n i fv pv 5 years 10 100 62 09 1825 days 0 027 100 60 66 Thus a little more than 62 dollars are needed to seek a 100 dollar future value with 10 percent interest paid annually and a five year term Time is the element of return on investment that plays the largest role as it is a variable in the exponent of the equation If one again can compress time and that is done where instead of calculating annually the interest is calculated daily the results are better Here it is clearly seen if compounding daily it takes a little over one dollar less to seek the same results If one could find this form of investment with no management fees it is clear the faster one compounds the more money results for the same period and interest rate Of course increasing the interest rate will do great things as well In today s CD rates at 1 and under it takes judicious investing care to seek out mutual funds with low management fees to create this form of return EFT s Electronic Fund Trades are another great avenue to invest These in invest in indexed sectors and some see very good rates of return
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