Part 1 – Single Cash Flow
BUS3062 Week 2 Assignment Template
Part 1: Time Value of Money Single Cash Flow
Solve the following problems and answer the last question. Example problems can be found on the "Example Single Cash Flow" tab below. Create an appropriate (TVM) formula using the supplied values in the appropriate cell so Excel can calculate the answer.
Calculations
1. How much would be in your savings account in 11 years after depositing $150 today, if the bank pays 7% per year? [Answer here]
2. A deposit of $350 earns the following interest rates: (a) 8% in the first year, (b) 6 in the second year, and (c) 5.5 in the third year. What would be the third year future value? [Answer here]
3. Compute the present value of an $850 payment made in 10 years when the discount rate is 12%. [Answer here]
4. What annual rate of return is earned on a $5,000 investment when it grows to $9,500 in five years? [Answer here]
5. What is the rate of interest if your money doubles every 6 years? This is also known as Rule of 72. [Answer here]
Question
6. Given the same annual interest rate, would you rather have a savings account that paid interest compounded on a monthly basis, or one that compounded interest on an annual basis? Perform the calculation to support your answer. [Answer here]
Part 2 – Annuity Cash Flows
Part 2: Time Value of Money Annuity Cash Flows
Solve the following problems and answer the last question. Example problems can be found on the "Example – Annuity Cash Flow" tab. Create an appropriate (TVM) formula using the supplied values in the appropriate cell so Excel can calculate the answer.
Calculations
1. What is the future value of a $1,000 annuity payment over five years if interest rates are 9%? [Write the formula here] [Answer here]
2. What is the present value of a $800 annuity payment over six years if interest rates are 10%? [Write the formula here] [Answer here]
3. Assume you purchased a house on January 1, 2020 for $200,000. You had made a down payment of 20% on the house and the balance was financed with a 30 year loan at 5% per annum stated APR with monthly payments to be made beginning January 1, 2020. What are your monthly payments? [Write the formula here] [Answer here]
4. Judith has just become eligible to participate in her company’s retirement plan. Her company does not match contributions, but the plan does average an annual return of 12%. Judith is 40 and plans to work to age 65. If she contributes $200 per month, how much will she have in her retirement plan at retirement? [Write the formula here] [Answer here]
5. How much do you have to deposit today so that exactly 10 years from now you can withdraw $10,000 a year for the next five years? Assume an interest rate of 6%. [Write the formula here] [Answer here]
Question
Imagine that a friend tells you that you should not rush to pay off your mortgage early because you will lose out on the interest tax deductions you are getting. Discuss the role of amortization of mortgages in your analysis of the issue. [Answer here]
Example – Single Cash Flow
BUS3062 Fundamentals of Finance
Time Value of Money (TVM) - Analyzing Single Cash Flows
Practice Problem Worksheet Using Excel Formulas
Make sure to read and study Chapter 4, "Time Value of Money 1: Analyzing Single Cash Flows," from your M: Finance text before reviewing the following problems and solutions.
Be advised that annual compounding is used in each of these practice problems, unless more frequent compounding is otherwise specifically disclosed.
Future Value
Future Value Problem 1) Here is a simple future value problem:
How much would you have in your savings account after 5 years if you deposited $1,000 today and it earned 6% interest per year? The co
ect answer is $1,338.23 determined below.
Solution: First, identify this is a future value problem (this is determined because we are asked how much money we will have (in the future.) That is our clue that this is a FV problem.
Next identify the known variables:
The interest rate: I = 6% (or 0.06 expressed as a decimal)
The number of time periods: N = 5
The present value: PV = 1,000 (note that you will enter PV as a negative number below)
Next using the Excel, Formulas, Financial, FV formula that reads as follows:
FV = (Int rate, Number of periods, next enter 0 because there are no recu
ing payments for this type of problem, enter the Present Value as a negative number)
inputting the numbers into the Excel FV formula in the exact order prescribed by the formula (click on Cell B32 to see the contents of the cell as inputted):
FV = $1,338.23
Future Value Problem 2
How much would you have after 10 years if you deposited $1,500 today and it earned 5% interest per year? The co
ect answer is $2,443.34 determined below.
FV = $2,443.34
Present Value
Present Value Problem 1
How much would you need to deposit today if you wanted to end up with $10,000 in your savings account in 8 years and the deposit would earned 7% interest per year? The co
ect answer is $5,820.09 determined below.
Solution: First, identify this is a present value problem (this is determined because we are asked how much money we need to deposit (today.) That is our clue that this is a PV problem.
Next identify the known variables:
The interest rate: I = 7% (or 0.07 expressed as a decimal)
The number of time periods in years: N =8
The future value: FV = 10,000
Next using the Excel, Formulas, Financial, PV formula that reads as follows:
PV = (Int rate, Number of periods, next enter 0 because there are no recu
ing payments for this type of problem, enter the Future Value)
Inputting the numbers into the Excel PV formula in the exact order prescribed by the formula (click on Cell B68 to see the contents of the cell as inputted):
PV = ($5,820.09) (Note that PV is solved showing it as a negative number. This is because of the formula that is used to solve the equation and represents that $5,820.09 must be paid out (an outflow) in order to receive the 10,000 (inflow) amount in the future. Even though the Excel mathematical equation solves the PV as a negative number, one should simply refer to the PV as $5,820.09 without reference to it as a negative number.)
Present Value Problem 2
What is the present value of $15,000 payment planned to be made in 12 years when the discount rate is 7%? The co
ect answer is $6, XXXXXXXXXXdetermined below.
PV = ($6,660.18)
Time Period
Solving for Time:
Problem 1: Here is a simple time value of money problem solving for number of periods:
How long would it take a deposit of $2,500 to grow to $3,500 assuming it earned 4.5% annual interest? The co
ect answer is 7.64 years determined below.
Solution: First, identify this is a time value of money problem attempting to solve for time. (Such time period problems are usually easy to identify and often state "how long will it take.")
Next identify the known variables:
The interest rate: I = 4.5% (or 0.045 expressed as a decimal)
The present value: PV = 2,500 (note you will enter PV as a negative number below)
The future value: FV = 3,500
Next using the Excel, Formulas, Financial, NPER formula that reads as follows:
NPER = (Int rate, next enter 0 because there are no recu
ing payments for this type of problem, enter the Present Value amount as a negative number, enter the future value amount)
inputting the numbers into the Excel NPER formula in the exact order prescribed by the formula (click on Cell B109 to see the contents of the cell as inputted):
NPER = 7.64 years
Problem 2
How long would it take a deposit of $150 to grow to $300 (another way of saying this would be "how long would it take any deposit to double") assuming it earned 7.5% annual interest? The co
ect answer is 9.58 years determined below.
NPER = 9.58 years
Annual Rate of Return
Solving for Interest Rate
Problem 1: Here is a simple problem solving for interest rate (annual rate of return):
What interest rate must you earn to turn your $3,000 deposit into $4,000 within 6 years? The co
ect answer is 4.91% determined below.
Solution: First, identify this is a time value of money problem attempting to solve for a requested interest rate. Such interest rate problems often state "what rate of interest must be earned..." or similar wording.
Next identify the known variables:
The number of time periods in years: N = 6
The present value: PV = 3,000 (note that you will enter PV as a negative number below)
The future value: FV = 4,000
Next using the Excel, Formulas, Financial, RATE formula that reads as follows:
RATE = (Number of time periods, next enter 0 since there are no recu
ing payments for this problem, enter the Present Value amount as a negative number, enter the Future Value amt.)
inputting the numbers into the Excel RATE formula in the exact order prescribed by the formula (click on Cell B148 to see the contents of the cell as inputted):
RATE = 4.91% (Make sure you change the number of decimals in the formula cell so you show at least 4 decimal places as is shown to the left, otherwise, your response would show 5% and that is not sufficiently exact and would be marked as inco
ect.)
RATE 2) Here is a simple time value of money solving for interest rate practice problem:
If you had $10,000 and needed it to grow to $12,000 within 3 years, what annual rate of return would you need to receive? The co
ect answer is 6.27% determined below.
NPER = 6.27% (Make sure you change the number of decimals in the formula cell so you show at least 4 decimal places as is shown to the left, otherwise, your response would show 6% and that is not sufficiently exact and would be marked as inco
ect.)
Differing Interest Rates
Solving for Future Value with differing rates of interest:
Problem 1: Here is a simple FV problem solving with differing interest rates:
A $1,500 deposit you make today is expected to earn 3% the first year, 4% the second year, 4.5% the third year, and 5% the fourth year. How much would you have at the end of the fourth