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Application of Time Value of Money Concepts
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 Problem 1 ­ Future Value of Investment If a firm has \$250,000 to invest and can earn 8.5%, compounded annually, how much will the firm have after two years? Rate Nper PMT PV Type FV 8.50% 2 \$0 \$250,000 0 \$294,306.25 Problem 2 ­ Future Value of Retirement Account A self­employed person deposits \$1,250 annually in a retirement account that earns 5.5%. What will be the account balance at age 62 if the savings program starts when the individual is age 50? Rate Nper PMT PV Type FV 5.50% 12 \$0 \$1,250.00 0 \$21,608.50 How much additional money will be in the account if the saver defers retirement until age 66 and continues the annual contributions u Hint: First calculate the FV of the account at age 66 and then subtract the FV determined above (at age 62) to arrive at the additional Rate Nper PMT PV Type FV 5.50% 16 \$0 \$1,250.00 0 \$32,495.50 \$10,887.00 Additional money saved if the contributions continue until age 66 The first part is a repeat of 1a. How much additional money will be in the account if the saver discontinues the contributions at age 62, but lets it build up until retirem Hint: First calculate the FV of the account at age 62, then utilize the FV of the account at age 62 as the PV in the FV calculation for th Finally, subtract the FV of the account at age 62 from the FV of the account with no additional contributions to arrive at the additiona Rate Nper PMT PV Type FV 5.50% 12 \$0 \$1,250.00 0 \$21,608.50 Rate Nper PMT PV Type FV 5.50% 4 \$21,608.50 0 \$608.50 \$26,769.14 Additional money saved if contributions stop at age 62, but the money keeps growing until age 66. Problem 3 ­ Present Value of Savings Account A father has decided to set aside a one time lump sum for college that will amount to \$60,000 by the time his 5 year old is 18 years old (13 years). Using 8% as the rate and assuming no further investments will be made,how much must the father invest today in order to have \$60,000 in 13 years? Rate Nper PMT FV Type PV 8.00% 13 0 \$60,000.00 0 \$22,061.88 Problem 4 ­ Home Loan A couple borrows \$935,000 for 7 years for the purchase of a vacation home at an interest rate of 7%. The loan requires that the interest and principal be paid in equal, annual payments. The interest is determined on the declining balance that is owed. What are the required annual payments on the loan? Rate Nper PV FV Type PMT Yearly payment owed How much is the principal loan balance reduced by during the first year? Hint: To determine the principal paid in year 1, subtract the interest paid in year 1 from the total yearly payment. Rate Principal loan value Interest paid in year 1 Total payment made in year 1

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• Application of Time Value of Money Concepts
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