Week 6 – Time Value of Money Assignment
- Choose the following statement that you believe to be true. Explain the reason for your answer.
- The present value of a future dollar is less than one dollar.
- The present value of a future dollar is more than one dollar.
- The present value of a future dollar is equal to one dollar.
- The present value of a future dollar cannot be determined.
- Use Google to locate an investment calculator to answer the questions below. (Assume compounding annually so the “number of times compounded” is one.
- What amount should I invest now that will give me $10,000 five years from now. My investment will provide me a 5% return compounded annually.
- Erin’s grandmother created a $5,000 trust for her on her 12th birthday to help toward her college expense. It will earn 10% interest compounded annually until her 18th How much will Erin receive at the end of six years?
- Which would you rather receive:
- $50,000 at the end of 3 years or
- $60,000 at the end of 5 years?
Assume a 10% rate of return compounded annually. (Hint: Compute the present value of each of these future values)
- Instead of setting up a trust fund, assume Erin’s grandmother wants to give her an amount on her 18th birthday that will allow her to withdraw $2,000 each of the next four years.
Hmmm….This is something you haven’t seen before. The series of four equal payments or receipts that occur at evenly spaced intervals is called an annuity. Notice that the website below provides a place for you to determine the present value of an annuity.
(Feel free to find your own calculator)
Assume the grandmother’s initial lump sum given on the 18th birthday will still be invested at 10% compounded annually. (After the first $2,000 is withdrawn, the remaining funds will still be invested earning 10%).
- How much should Grandma initially invest at 10%
- Is the initial investment more or less than the $8,000 Erin will withdraw? Why?
