CH3 -- Time Value of Money

THIS DISCUSSION BOARD REMAINS ACTIVE TILL From 8/29 to 9/4

***USE THE DATE AUGUST 20,1992 WHEN DOING PROBLEMS***

Each student should answer question 1. Answer to the question 1 is related to your actual age. Simplify your age to the month, if for example your age is 20 years 1 month and 19 days, use 20 years and 2 months. If your age is 34 years and one month and 3 days, use 34 years and one month, in other words, bring your age to closest month.

IMPORTANT NOTE: When answering a question, copy the whole question (Dont write Q1 or Q7) so that another student see your answer, he or she can relate the answer to the question.

1. Assume you drink one coffee per day, 5 days a week. Assume coffee price is $4.00. That makes it $20 per week and $80 per month. Assume you can invest $80 per month in the stock market and assume you can earn 1 % per month on your stock investment or 12 % per year.

A: At your retirement, when you are 65 years old, how much you will have in your retirement account if you switch from coffee drinking to investing in the stock market?

B. Assume that when you get to 65 (retirement age) you switch your funds from stock market investment to bond market investment. Assume you can earn 7% on your bond investment. You decide to withdraw a constant amount each year for the next 20 years when you get to retirement age of 65. How much will be your annual withdrawal from age 66 to 85 (Nothing left at 85) if you switch your coffee drinking to stock and bond investments.

I start first: Assume I am 54 and I retire at age 68, how much will be the total amount of money in my account if I switch from coffee drinking to investing in the stock market? B) How much a can withdraw per year after I get 68 years old, for 20 years?

ANSWER:

Assume I am 54 years old and will retire at age 68:

Retire in 14 years at age 68.

Excel

1.a

Inputs

Interest

1.00%

Period

168

(14*12)

Payment

80

FV

($34,567.76)

FV(B7,B8,B9,0,0); B7,B8,B9=1%,168,80

1.b

inputs

Interest

7.00%

Period

20

PV

($34,567.76)

PMT

$3,262.95

PMT(B16,B17,B18,0,0) B16,B17,B18=7%,20,(34567)

Calculator

HP 12 C

1.a

168 n, 1 INT, 80 PMT, 0 PV, then push on FV and you will get the following answer: 34,567.76

1.b

20 n, 7 INT, 34,567.76 PV, FV 0, then push on PMT button and you will get 3,262.95

Mathematical Formula

1.a

(1 + i)n =

5.32096982

(1 + i)n -1 =

4.32096982

[(1 + i)n -1]/i =

432.096982

PMT[(1 + i)n -1]/i =

$34,567.76

1.b

(1 + i)n =

3.86968446

1/(1 + i)n =

0.258419

[1-1/(1 + i)n] =

0.741581

[1-1/(1 + i)n]/i =

10.5940142

PV =

$34,567.76

PMT =

$3,262.95