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FIN2110 Finance Basics for ManagersFall 2011 Time Value of Money Problems Calculating Future Values Assume you deposit $10,000 today in an account that pays 6% interest. How much will you have in five years? = $10,000 (FVIF of 6%, 5years) = $10,000 * 1. 3382 = $13,382 Calculating Present Values Suppose you have just celebrated your 19th birthday. A rich uncle has set up a trust fund for you that will pay you $150,000 when you turn 30. If the relevant discount rate is 9%, how much is the fund worth today? We know,
Present Value = Future Cash Flow / (1 + Required Rate of Return) ^Number of Years You Have To Wait For The Cash Flow Given, Present value = $150,000 / (1 + . 09) ^ 11 = $150,000 / 2. 5804 = $ 58,130 Therefore, The present value is thus about $58,130. Calculating Rates of Return You’ve been offered an investment that will double your money in 10 years. What rate of return are you being offered? Use the Rule of 72 to calculate the answer. Suppose, we spend $1,000, than according the question the money will be double in 10 years which will $2,000. So, Present value = $1,000
Future Value = $2,000 Time = $ 10 year $2,000 = $1,000 * (1 + r)^10 2 = (1 + r) ^10 2(1/10) = 1 + r r = 7. 18% For each of the following, compute the future value: Present ValueYearsInterest RateFuture Value $2,2501110% $6419. 51 $8,74278% $14,982. 25 $76,3551417% $687,764. 17 $183,79687% $315,795. 75 For each of the following, compute the present value: Present ValueYearsInterest RateFuture Value $10,295. 6567%$15,451 $21,914. 85713%$51,557 $43,516. 902314%$886,073 $116,631. 32189%$550,164