Question

Time value of money is a financial concept that illustrates how the value of money grows over time. This takes into consideration that the money can be invested at a specified interest rate, that grows. One financial concept is present value (PV) and another financial concept is future value (FV).

• Discuss and show one example of how the present value formula is a good method to determine how much is needed to save monthly, in order to have a specified sum of money at retirement age in 25 years at 8% interest.
• Discuss and show one example of how the future value formula is a good method to determine how much of a lump sum is needed today, to invest for 25 years to reach a specified retirement amount, with 8% interest.

Answer 1

1. Use PMT function to find the monthly deposits needed to have some accumulated amount in the future.

For example if you need $1,000,000 in 25 years with an interest rate of 8%.

=PMT(rate,nper,pv,fv,type)

rate=8%/12=0.67%

nper=25*12=300 months

pv=0

fv=1000000

=PMT(0.67%,300,0,1000000,0)=$1051.50

The monthly savings=$1051.50

2. for exaample if you can deposit $2000 per month, the future value in 25 years at 8% has to be found using FV function in EXCEL

=FV(rate,nper,pmt,pv,type)

rate=8%/12=0.67%

nper=25*12=300 months

pmt=2000

pv=0

=FV(0.67%,300,-2000,0,0)=$1,902,053

The Future value=$1,902,053