Respond to…
Think of something you want or need for which you currently do not have the funds. It could be a vehicle, boat, horse, jewelry, property, vacation, college fund, retirement money, etc. Select something which costs somewhere between $2,000 and $50,000. Use the “Present Value Formula”, which computes how much money you need to start with now to achieve the desired monetary goal. Assume you will find an investment that promises somewhere between 5% and 10% interest on your money (you choose the rate) and pretend you want to purchase your desired item in 12 years. (Remember that the higher the return, usually the riskier the investment, so think carefully before deciding on the interest rate.) How much do you need to invest today to reach that desired amount 12 years from now?
I would like to buy a $20,000 vehicle for my grandchild in 12 years. I have chosen an investment that will give me 5% interest on my money. I have used the PV Formula in excel =PV(5%, 12, -500, 20000, 1) and if I made $500.00 monthly payments. I would need to put down $6,483.54 in order to get $20,000 in 12 years.
You wish to leave an endowment for your heirs that goes into effect 50 years from today. You don’t want to be forgotten after you pass so you wish to leave an endowment that will pay for a grand soirée yearly and forever. What amount would you like spent yearly to fund this grand party? How much money do you have to leave to your heirs 50 years from now assuming that will compound at 6% interest? Assuming that you have not invested anything today, how much would you have to invest yearly to fully fund the annuity in 50 years, again assuming a 6% monthly compounding rate?
For my soiree I have decided that I would contribute $1000 a month for the next 50 years. I used the FV Formula in excel = (FV(6%, 50, -1000, 0, 1). This would give me $307,756.06 for my endowment.
I really hope that I did this right.
Respond to…
The value of money can change over time due to factors of market changes such as inflation and deflation. Therefore, it’s important to understand the present value of money when making any investment. The present value (PV) is the current value of a future stream of revenue, while the future value is tan assets worth on a specific date and can be determine through the formula; FV=PV (1+ I)n and PV=FV/(1+I)n (Byrd, Hickman & McPherson, 2013).
- Like most individuals, I am most likely to purchase a new vehicle in the next 12 years using the maximum of $50,000 with an investment that has a 7% return.
FV = $50,000
N = 12
I = 7%
PV = 50,000/ (1+.07)^n
PV= 22,200.60
According to the calculations I would need an initial investment of $22,200.60 with an 7% return in order to reach my monetary goal of $50,000 in 12 years.
- If leaving an endowment for my heirs that goes into effect 50 years from today, so that the money could pay for a yearly party. I would like for my heirs to spend $25,000 each year on the party.
PV0 = CF/r
PV = $25,000/.06
PV = $416,666
Annually
416,666/ (1+.06) ^50)-1/.06
416,666/1.06^50)-1/.06
416,666/(18.42-1)/.06
416,666/290
1436.78/12
=119.73
Assuming a 6% compounded rate, I would have to leave my heirs $416,666 and invest $1436.78 a year, which breaks down to $119.73 a month.
References:
Byrd, J., Hickman, K., & McPherson, M. (2013). Managerial Finance [Electronic version]. Retrieved from https://content.ashford.edu/