ACCT 200: LAB 5 - TIME VALUE OF MONEY ACTIVTY TIME VALUE OF MONEY FORMULAS & HINTS . Formulas Future Value of a Present Payment = Present Value x Future Value Factor (0) FV = PV XFV (0 Present Value of a Future Payment = Future Value x Present Value Factor (0) PV = FV x PV 10.00 Future Value of an Annuity = Payment x Future Value of Annuity Factor (0.] FVA = PMT X FVA (0.3 Present Value of an Annuity = Payment x Present Value of Annuity Factor (0) PVA = PMT X PVA (0. Hints for Solving TVM Problems 1. Use the following chart. One field will be not applicable and one field will be unknown and will need to be solved. Present Value $3,000 Future Value ? Payment NA Number of Periods 10 years Interest Rate 12% 2. Always multiply the amount by the factor unless you are solving for the payment. For example, with the data above, multiply $3,000 by the FV factor (10,12%) 3. If a problem compounds interest monthly, quarterly or semi-annually anything other than annually), you will need to multiply the years times the number of compounding periods and divide the interest rate by the number of compounding periods. For example, with the data above, if the interest was compounded quarterly, you would multiply 10 years times a periods per year (or 40 total periods) and divide the annual interest rate of 12% by 4 periods per year (or 3% quarterly) 4. A visual timeline of cash flows makes difficult problems more manageable. TIME VALUE OF MONEY PROBLEMS 1. Fil in the missing amount in each independent column: A, B, C (TVM of a Single Sum) Present Value Years Interest Rate Future Value (Annual) $15,000 6 4% 2 B (Semi-Annual) $12,000 10 10% 2 C (Annual) ? 15 8% $25,000 ACCT 200 FUNDAMENTALS OF FINANCIAL ACCOUNTING TVM ACTIVITY | PAGE 1 2. Fill in the missing amounts in each independent column: A, B, and C (TVM of an Annuity); Present Value Future Value Years Interest Rate Payment A B (Annual) (Annual) ? $150,000 N/A N/A 10 15 8% 6% $12.000 ? (Annual) NA ? 5 8% $3.500 3. Kim just got a job. She is so happy that she decided to reward herself by purchasing a rare 1980 blue YUGO. TA-R-US used cars has given her the option of paying $14,000 now or making 8 annual payments of $2,000 starting in exactly 1 year. The interest rate is 9%. Which plan should Kim choose? 4. Emma's goal in life is to own a ballet studio Kenzie currently owns a studio, but she has plans to sell it. Emma agreed to pay Kenzie $3,000,000 5 years from today to acquire the studio. How much wilEmma need to invest at 6% today to have enough money in 5 years 5. When Charlie was paying for his gas at the gas station, he saw the shiny Kansas Lottery tickets and decided to play. To his surprise, he won $10,000! If Charlie invests his winnings in an account that earns him 6% interest each year, how much money wil he have in 20 years? ACCT 2001 FUNDAMENTALS OF FINANCIAL ACCOUNTING TVM ACTIVITY | PAGE 2 6. Sam is planning a summer trip to Italy so he can study accounting where the world-famous accountant Luca Pacioli did Unfortunately, Sam Is short of $7,500 for the trip due to his recent injury Luke has agreed to loan Sam the money because he believes that the homage to the double-entry birthplace is a must for al accountants. Luke expects to be paid back at 8% interest in annual payments over 6 years. What is the annual payment? 7. Your TA wants to give you some money, but they also want to test your comprehension of the material covered in ACCT 200. Thus, they have provided you with the following three options to receive the funds. Assume a 45 interest rate and choose the best option or receive nothing! Option 1: $3,000,000 today Option 2 $500,000 at the end of each year for 6 years Option 3. $1,000,000 today: $1,500,000 at the end of 3 years, and $500,000 at the end of the 6th year 8. Joshua had an offer from Chick-fil-A that would allow him to eat all the chicken sandwiches he can eat five times a week for two years (so he doesn't need to learn how to cook). The price Chick-fil-A is planning to charge him is $35 per month for 2 years. The interest rate is 12%. What is the present value of this food extravaganza? 9. Last summer, Molly had so much fun studying abroad and eating pretzels in Germany that she now wants to buy her own German pretzel bakery, Molly found a pretzel bakery for sale, but Jessica, the current owner, cannot sell it for 7 years Jessica will accept $68,000 for the bakery in 7 years. Molly just invested $5,000 today at 8%, which she will use to partially pay Jessica Molly needs to know how much more to invest 4 years from now at 8%, in order to have enough money to purchase the bakery at the end of 7 years 2 ACCT 200 FUNDAMENTALS OF FINANCIAL ACCOUNTING TVM ACTIVITY | PAGE 3 10. Assume that after you graduate from college, you are able save $2,000 per year. If you put the money in a 4% interest bearing savings account at the end of each year for 15 years, how much money would you have? 11. Assume you will retire in 20 years and live 20 more years after that. Your annual spending requirements during retirement will be $90,000 per year at the end of each year. If the interest rate is 10%, how much must you invest today to fund your retirement? 20 Years 40 Years ACCT 200 FUNDAMENTALS OF FINANCIAL ACCOUNTING TVM ACTIVITY IPAGE 4 ACCT 200: LAB 5 - TIME VALUE OF MONEY ACTIVTY TIME VALUE OF MONEY FORMULAS & HINTS . Formulas Future Value of a Present Payment = Present Value x Future Value Factor (0) FV = PV XFV (0 Present Value of a Future Payment = Future Value x Present Value Factor (0) PV = FV x PV 10.00 Future Value of an Annuity = Payment x Future Value of Annuity Factor (0.] FVA = PMT X FVA (0.3 Present Value of an Annuity = Payment x Present Value of Annuity Factor (0) PVA = PMT X PVA (0. Hints for Solving TVM Problems 1. Use the following chart. One field will be not applicable and one field will be unknown and will need to be solved. Present Value $3,000 Future Value ? Payment NA Number of Periods 10 years Interest Rate 12% 2. Always multiply the amount by the factor unless you are solving for the payment. For example, with the data above, multiply $3,000 by the FV factor (10,12%) 3. If a problem compounds interest monthly, quarterly or semi-annually anything other than annually), you will need to multiply the years times the number of compounding periods and divide the interest rate by the number of compounding periods. For example, with the data above, if the interest was compounded quarterly, you would multiply 10 years times a periods per year (or 40 total periods) and divide the annual interest rate of 12% by 4 periods per year (or 3% quarterly) 4. A visual timeline of cash flows makes difficult problems more manageable. TIME VALUE OF MONEY PROBLEMS 1. Fil in the missing amount in each independent column: A, B, C (TVM of a Single Sum) Present Value Years Interest Rate Future Value (Annual) $15,000 6 4% 2 B (Semi-Annual) $12,000 10 10% 2 C (Annual) ? 15 8% $25,000 ACCT 200 FUNDAMENTALS OF FINANCIAL ACCOUNTING TVM ACTIVITY | PAGE 1 2. Fill in the missing amounts in each independent column: A, B, and C (TVM of an Annuity); Present Value Future Value Years Interest Rate Payment A B (Annual) (Annual) ? $150,000 N/A N/A 10 15 8% 6% $12.000 ? (Annual) NA ? 5 8% $3.500 3. Kim just got a job. She is so happy that she decided to reward herself by purchasing a rare 1980 blue YUGO. TA-R-US used cars has given her the option of paying $14,000 now or making 8 annual payments of $2,000 starting in exactly 1 year. The interest rate is 9%. Which plan should Kim choose? 4. Emma's goal in life is to own a ballet studio Kenzie currently owns a studio, but she has plans to sell it. Emma agreed to pay Kenzie $3,000,000 5 years from today to acquire the studio. How much wilEmma need to invest at 6% today to have enough money in 5 years 5. When Charlie was paying for his gas at the gas station, he saw the shiny Kansas Lottery tickets and decided to play. To his surprise, he won $10,000! If Charlie invests his winnings in an account that earns him 6% interest each year, how much money wil he have in 20 years? ACCT 2001 FUNDAMENTALS OF FINANCIAL ACCOUNTING TVM ACTIVITY | PAGE 2 ACCT 200: LAB 5 - TIME VALUE OF MONEY ACTIVTY TIME VALUE OF MONEY FORMULAS & HINTS . Formulas Future Value of a Present Payment = Present Value x Future Value Factor (0) FV = PV XFV (0 Present Value of a Future Payment = Future Value x Present Value Factor (0) PV = FV x PV 10.00 Future Value of an Annuity = Payment x Future Value of Annuity Factor (0.] FVA = PMT X FVA (0.3 Present Value of an Annuity = Payment x Present Value of Annuity Factor (0) PVA = PMT X PVA (0. Hints for Solving TVM Problems 1. Use the following chart. One field will be not applicable and one field will be unknown and will need to be solved. Present Value $3,000 Future Value ? Payment NA Number of Periods 10 years Interest Rate 12% 2. Always multiply the amount by the factor unless you are solving for the payment. For example, with the data above, multiply $3,000 by the FV factor (10,12%) 3. If a problem compounds interest monthly, quarterly or semi-annually anything other than annually), you will need to multiply the years times the number of compounding periods and divide the interest rate by the number of compounding periods. For example, with the data above, if the interest was compounded quarterly, you would multiply 10 years times a periods per year (or 40 total periods) and divide the annual interest rate of 12% by 4 periods per year (or 3% quarterly) 4. A visual timeline of cash flows makes difficult problems more manageable. TIME VALUE OF MONEY PROBLEMS 1. Fil in the missing amount in each independent column: A, B, C (TVM of a Single Sum) Present Value Years Interest Rate Future Value (Annual) $15,000 6 4% 2 B (Semi-Annual) $12,000 10 10% 2 C (Annual) ? 15 8% $25,000 ACCT 200 FUNDAMENTALS OF FINANCIAL ACCOUNTING TVM ACTIVITY | PAGE 1 2. Fill in the missing amounts in each independent column: A, B, and C (TVM of an Annuity); Present Value Future Value Years Interest Rate Payment A B (Annual) (Annual) ? $150,000 N/A N/A 10 15 8% 6% $12.000 ? (Annual) NA ? 5 8% $3.500 3. Kim just got a job. She is so happy that she decided to reward herself by purchasing a rare 1980 blue YUGO. TA-R-US used cars has given her the option of paying $14,000 now or making 8 annual payments of $2,000 starting in exactly 1 year. The interest rate is 9%. Which plan should Kim choose? 4. Emma's goal in life is to own a ballet studio Kenzie currently owns a studio, but she has plans to sell it. Emma agreed to pay Kenzie $3,000,000 5 years from today to acquire the studio. How much wilEmma need to invest at 6% today to have enough money in 5 years 5. When Charlie was paying for his gas at the gas station, he saw the shiny Kansas Lottery tickets and decided to play. To his surprise, he won $10,000! If Charlie invests his winnings in an account that earns him 6% interest each year, how much money wil he have in 20 years? ACCT 2001 FUNDAMENTALS OF FINANCIAL ACCOUNTING TVM ACTIVITY | PAGE 2 6. Sam is planning a summer trip to Italy so he can study accounting where the world-famous accountant Luca Pacioli did Unfortunately, Sam Is short of $7,500 for the trip due to his recent injury Luke has agreed to loan Sam the money because he believes that the homage to the double-entry birthplace is a must for al accountants. Luke expects to be paid back at 8% interest in annual payments over 6 years. What is the annual payment? 7. Your TA wants to give you some money, but they also want to test your comprehension of the material covered in ACCT 200. Thus, they have provided you with the following three options to receive the funds. Assume a 45 interest rate and choose the best option or receive nothing! Option 1: $3,000,000 today Option 2 $500,000 at the end of each year for 6 years Option 3. $1,000,000 today: $1,500,000 at the end of 3 years, and $500,000 at the end of the 6th year 8. Joshua had an offer from Chick-fil-A that would allow him to eat all the chicken sandwiches he can eat five times a week for two years (so he doesn't need to learn how to cook). The price Chick-fil-A is planning to charge him is $35 per month for 2 years. The interest rate is 12%. What is the present value of this food extravaganza? 9. Last summer, Molly had so much fun studying abroad and eating pretzels in Germany that she now wants to buy her own German pretzel bakery, Molly found a pretzel bakery for sale, but Jessica, the current owner, cannot sell it for 7 years Jessica will accept $68,000 for the bakery in 7 years. Molly just invested $5,000 today at 8%, which she will use to partially pay Jessica Molly needs to know how much more to invest 4 years from now at 8%, in order to have enough money to purchase the bakery at the end of 7 years 2 ACCT 200 FUNDAMENTALS OF FINANCIAL ACCOUNTING TVM ACTIVITY | PAGE 3 10. Assume that after you graduate from college, you are able save $2,000 per year. If you put the money in a 4% interest bearing savings account at the end of each year for 15 years, how much money would you have? 11. Assume you will retire in 20 years and live 20 more years after that. Your annual spending requirements during retirement will be $90,000 per year at the end of each year. If the interest rate is 10%, how much must you invest today to fund your retirement? 20 Years 40 Years ACCT 200 FUNDAMENTALS OF FINANCIAL ACCOUNTING TVM ACTIVITY IPAGE 4 ACCT 200: LAB 5 - TIME VALUE OF MONEY ACTIVTY TIME VALUE OF MONEY FORMULAS & HINTS . Formulas Future Value of a Present Payment = Present Value x Future Value Factor (0) FV = PV XFV (0 Present Value of a Future Payment = Future Value x Present Value Factor (0) PV = FV x PV 10.00 Future Value of an Annuity = Payment x Future Value of Annuity Factor (0.] FVA = PMT X FVA (0.3 Present Value of an Annuity = Payment x Present Value of Annuity Factor (0) PVA = PMT X PVA (0. Hints for Solving TVM Problems 1. Use the following chart. One field will be not applicable and one field will be unknown and will need to be solved. Present Value $3,000 Future Value ? Payment NA Number of Periods 10 years Interest Rate 12% 2. Always multiply the amount by the factor unless you are solving for the payment. For example, with the data above, multiply $3,000 by the FV factor (10,12%) 3. If a problem compounds interest monthly, quarterly or semi-annually anything other than annually), you will need to multiply the years times the number of compounding periods and divide the interest rate by the number of compounding periods. For example, with the data above, if the interest was compounded quarterly, you would multiply 10 years times a periods per year (or 40 total periods) and divide the annual interest rate of 12% by 4 periods per year (or 3% quarterly) 4. A visual timeline of cash flows makes difficult problems more manageable. TIME VALUE OF MONEY PROBLEMS 1. Fil in the missing amount in each independent column: A, B, C (TVM of a Single Sum) Present Value Years Interest Rate Future Value (Annual) $15,000 6 4% 2 B (Semi-Annual) $12,000 10 10% 2 C (Annual) ? 15 8% $25,000 ACCT 200 FUNDAMENTALS OF FINANCIAL ACCOUNTING TVM ACTIVITY | PAGE 1 2. Fill in the missing amounts in each independent column: A, B, and C (TVM of an Annuity); Present Value Future Value Years Interest Rate Payment A B (Annual) (Annual) ? $150,000 N/A N/A 10 15 8% 6% $12.000 ? (Annual) NA ? 5 8% $3.500 3. Kim just got a job. She is so happy that she decided to reward herself by purchasing a rare 1980 blue YUGO. TA-R-US used cars has given her the option of paying $14,000 now or making 8 annual payments of $2,000 starting in exactly 1 year. The interest rate is 9%. Which plan should Kim choose? 4. Emma's goal in life is to own a ballet studio Kenzie currently owns a studio, but she has plans to sell it. Emma agreed to pay Kenzie $3,000,000 5 years from today to acquire the studio. How much wilEmma need to invest at 6% today to have enough money in 5 years 5. When Charlie was paying for his gas at the gas station, he saw the shiny Kansas Lottery tickets and decided to play. To his surprise, he won $10,000! If Charlie invests his winnings in an account that earns him 6% interest each year, how much money wil he have in 20 years? ACCT 2001 FUNDAMENTALS OF FINANCIAL ACCOUNTING TVM ACTIVITY | PAGE 2