Question

Please do not write in handwriting and The answer is not similar to another person.

(Finance 101)

DISCUSSION

1. You are planning to take a spring break trip to Canada your senior year. The trip is exactly two years away, but you want to be prepared and have enough money when the time comes. Explain how you would determine the amount of money you will have to save in order to pay for the trip.

2. Identify the steps involved in computing the present value when you have multiple cash flows.

Answer 1

1. How to Save Money: Strategies for Saving in Canada:-

There are many tried and true ways of how to save money each month.

• Every day put all of your loose change into a jar. Every once in a while deposit the money in your savings account. In time the money will grow into a little nest egg.
• Try to set aside a certain amount of money each month or each paycheque for your savings. People have been doing this for years, but it takes discipline.

Use Many Savings Accounts:

• If you find a bank or credit union that offers a free savings account, you can open up several savings accounts. Then every time you get paid, you can put money into each of these accounts for every specific thing that you are saving for. This way you can keep your money safe from accidently being spent, and it will be there when you need it.

The Smartest Method to Save Money:

• The very best method to saving money is to create a Spending Plan or a Budget (learn how to make a budget). With a budget you figure out what your income is and what your expenses are. Once you know these two things, you can look for ways to reduce your expenses or increase your income to allocate an amount of money that you can afford to save. This is how the world’s largest corporations do it and this is how most of the world’s successful business people do it. This method takes a little bit of work at the beginning and a check-up every year or two, but it works.

Other Investments:

• There are numerous other investments that you can use to save your money: money market funds, bonds, stocks, mutual funds and the list goes on. If you plan to spend the money that you are saving within five years, it is best to find something safe to invest in. For most people a high interest savings account or a term deposit within a Tax Free Savings Account works just fine. These options are safe and sure you know that your money is going to be there when you need it the same can’t be said if you choose to invest in something that has a lot more risk like the stock market.

2. Computing the present value when you have multiple cash flows:-

• To find the PV of multiple cash flows, each cash flow much be discounted to a specific point in time and then added to the others.
• To discount annuities to a time prior to their start date, they must be discounted to the start date, and then discounted to the present as a single cash flow.
• Multiple cash flow investments that are not annuities unfortunately cannot be discounted by any other method but by discounting each cash flow and summing them together.
• Discount: To find the value of a sum of money at some earlier point in time. To find the present value.
• NPV: the present value of a project or an investment decision determined by summing the discounted incoming and outgoing future cash flows resulting from the decision
• The PV of multiple cash flows follows the same logic as the FV of multiple cash flows. The PV of multiple cash flows is simply the sum of the present values of each individual cash flow.

Formula :- PVn=CFn/(1+in)n