Uncertain economic times intensify the importance of wise personal financial decisions. Each year, more than a million people declare bankruptcy and Americans lose more than a billion dollars in fraudulent investments. Both of these common difficulties result from poor personal financial planning and incomplete information.
Your ability to make wise money decisions is the basis for your current and long term financial well-being. Understanding the Time Value of Money is one (powerful) tool for you to use when faced with certain financial decisions. Let’s practice a few problems based on some common “real life” scenarios. For the Assignment In a Word file, address the following scenarios using this website e as a guide to help you. Show all of your work!
1. Calculate the future value of a single amount You were left $3500 from your grandmother’s will and have decided to invest it.
You have a couple of investment options in mind and are curious how much $3500 will be worth at the end of years 1 to 5, assuming a constant interest rate of 8%.
2. Calculate the doubling period. You’re also curious when your money will double, assuming the same 8% interest rate and want to use the “Rule of 69” for the most accurate prediction.
3. Calculate the present value of a single future amount Your grandmother was a finance professor at Champlain College and, for some reason, always challenged you to “think critically” and “figure out the math” for just about every financial decision you made in your life…and certainly when it came to asking her for money. In her will she left you one last tricky set of options – two additional options for the cash, one of which was to receive the $3500 three years from now. She asked you to calculate the present value of the future $3500 using an ROI of 8% and make a decision on whether you want the cash three years from now, or not.
4. Calculate the future value of an annuity. The final option your grandmother presented to you was to receive a regular annuity payment $700 over 5 years and she wanted you to calculate the annuity’s future value with an ROI of 8%. Do you chose this option? Why or why not?
