Basic HTML Version
Q
uantitative
R
easoning &
P
roblem
S
olving
368
© 2014 Pacific Crest
There is an Annuity Payout Calculator available from the companion website that allows you to
calculate any one of the four variables for an annuity, Principal (P), Payout (PMT), Rate (r), or Number
of Payments (n), when you input values for the other three. Note that the rate r is entered without the %
(i.e., 7% is entered simply as 7 on this site).
O
ops
! A
voiding
C
ommon
E
rrors
●
Accepting the data as-is instead of challenging its quality
Example
: Survey data has different partial results (survey participants chose to fill out what
mattered to them) but is not consistent with respect to which parts were filed out by
each participant.
Why?
The filling out of the survey could be very biased, where participants focused on the
areas that best matched their self-interest. It is important to constantly ask “
Why?”
when looking at data. If you can identify the reasons and rationale for how the survey
was conducted, the data generated from that survey has greater validity for your use.
●
Entering the rate incorrectly into the formula
Example
: For the scenario in the first methodology, you were very surprised to have an amount
FV
= $186 × 10
12
after 8 years! That’s more than 10 times the 2014 national debt!
Why?
You entered the 5% rate as
r
= 5 rather than
r
= .05 in the formula.
●
Entering the annual rate rather than the rate per period in the formula.
Example
: When calculating the amount in an annuity, using r = .09 rather than
.09
12
r
=
gives a
surprisingly large (but wrong) amount, $33 quadrillion for your retirement.
Why?
The value for
r
in the formula (or Excel) must be the interest rate per period, not the
annual interest rate.
●
Forgetting to account for the number of compounding periods in the formulas
Example
: If you calculate
FV
in the first example only compounding annually (
n
= 1), you get
FV
= $1477.46.
Why?
Compounding more often increases the account balance (up to a limit that occurs
with “continuous” compounding).
A
re You Ready?
Before continuing, you should be able to ...
I can...
OR
Here’s my question...
calculate the amount in an account
earning simple or compound interest
calculate the amount to invest now in or-
der to have a given amount in the future
use Excel to calculate the amount of
money that an annuity will generate