Understanding and Benefiting from the Time Value of Money. Contents. Introductory applied questions Basic formulas and computations Present Value and Future Value Annuities Practical applications of Time Value Practice problems Website links. Money is worth more as time progresses
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Understanding and Benefiting from the Time Value of Money
If you invested $1,000 for one year at 10%, how much would you have at the end of a year?
$1,000 x 1.10 = $1,100 Thus,
Present value (1 + interest rate) = Future Value
Thus the FV = PV x FVIF
$1,100 x 1.10 = $ 1,210
1,100 x 1.102 = $ 1,210 or
1, 000 x 1.21 = $ 1,210
Future Value = PV x (1+ Interest rate)number years
Invest $500 for 4 years at 8 percent rate of return, how much will you have at the end of the fourth year?
Using Formula & Table
= 500 (1.360)
FV = $ 680
FV = $680
If you are 20 years old and today invest $1000 dollars at 7%, what will your $1,000 be worth when you are 65 years old?
If you didn’t get the correct answer, perhaps the next three slides will help you
Now, let’s try another problem…
If you wait until you are 35 years old and invest $1000 dollars at 7%, what will your $1,000 be worth when you are 65 years old?
You will need $8,000 in 5 years to make a down payment on a house. How much would you need to put aside today to achieve your goal if you are earning 6% on your money?
If you are 25 years old and invest $1000 dollars each year at 7%, what will your investments be worth when you are 65 years old?
If you waited until you were 35 to start making those payments, how much would you have at age 65?
(press 12 shift pmt)
How much more would you pay for the house over the life of the loan if you chose the 30-year note rather than the 15-year note?
PMT $ 927.01
(PMT x 12 x 15)
= $ 166,862
= $ 264,154
15- year loan
1st year’s payments:
Balance $ 96,248.64
1st year’s payments:
Interest $ 7,969.80
Principle $ 835.37
Balance $ 99,164.63
$1000 pmt (1/year)
Turn on Begin (shift BEG/END)