Basic HTML Version
© 2014 Pacific Crest
369
P
lan
How to complete the activity
1. Study the model.
2. Answer the Critical Thinking questions.
3. Complete Model 2 as a team, answering questions a through i.
a. Decide what type of problem it is (i.e., PV, FV, annuity, and/or some combination).
b. Use appropriate formulas to calculate and validate the results.
4. Complete the remainder of this activity (from Demonstrate Your Understanding through Assessing
Your Performance) on your own, or as directed by your instructor.
M
odel(s)
Exemplars and representations
M
odel
1: I
nheritance
and
I
nvestment
Scenario:
At age 30 you inherit $25,000 from your grandparents’ estate. You decide to use
$5000 of the money as a down payment on a new car and you invest the remainder
in an account paying 6% interest, compounded daily, where you leave the money
until you turn 60. How much money will you have at that time?
Step Methodology for Calculating Future Value
1
.06
Compound interest where
20000,
,
30 365
365
PV
r
n
=
=
=
2
30 365
.06
Value of the account at age 60:
20000 1
$120, 975.05
365
FV
=
+
=
3
.06
Using Excel: = (
, 365*30, 9, 20000) validates that result.
365
FV
−
At that point you want to use this money to set up an annuity that will pay you monthly payments for the
next 20 years. How much money can you expect each month?
Step Methodology for Calculating the Payout for a Lump Sum Annuity
1
.06
120975.05,
,
20 12, ending amount 0
12
P
r
n
=
=
=
=
2
240
240
.005(1.005)
120975.05
$866.70
(1.005)
1
PMT
=
=
−
You can expect $866.70 per month for 20 years.
3
The total payout from this annuity will be just over $208,000.
4
Using Excel PMT formula: = (.005, 240, 120975.05, 0)*240 = $208,008.68
PMT
−
8.2 Time Value of Money