Question

4.4 - PV and FV with Multiple Time Periods
1) What is the future value of $100 invested at 10% compounded annually for 10 years?
2) What is the present value of an investment that will give you $100 after 10 years with a rate of 10% compounded annually?
3) True or False? Future values are positively related to interest rates and time - the bigger the interest rate and the more compounding periods, the greater the future value will be.

4.5 - Using a financial calculator to solve TVM problems
1) You end up with $20,000 after investing for 20 years at 8% annually. What was the PV?
2) Maverick Jane places $800 in a savings account paying 6% interest compounded annually. How much money will be in the account at the end of five year?

Answer 1

Answer : 4.4)

1) Calculation of Future Value :

Future Value = Present Value * (1 + rate)^number of years

= 100 * (1 + 0.10)^10

= 100 * 2.5937424601

= 259.37

2) Calculation of Present Value

Present Value = Future Value /[ (1 + rate)^number of years]

= 100 / [ (1 + 0.10)^10]

= 100 /  2.5937424601

= 38.55433 or 38.55

3.) True .Future values are positively related to interest rates and time - the bigger the interest rate and the more compounding periods, the greater the future value will be.This is because when we increase the number of period and interest rate the more interest will be given.

Answer :4.5)

1)Using Financial Calculator :

Using PV function of Excel

=PV(rate,nper,pmt,fv)

where

rate is rate of interest per period i.e 8%

nper is the number of periods i.e 20

pmt is periodic payment i.e 0

fv is the future value i.e 20000

=PV(8%,20,0,-20000)

Present Value is 4290.96

(2)Using Future value function of Excel

=FV(rate,nper,pmt,pv)

where

rate is rate of interest per period i.e 6%

nper is the number of periods i.e 5

pmt is periodic payment i.e 0

pv is the Present value i.e 800

=FV(6%,5,0,-800)

Future Value is 1070.58