Think of something you want or need for which you currently do not have the funds. It could be a vehicle, boat, horse, jewelry, property, vacation, college fund, retirement money, etc. Select something which costs somewhere between $2,000 and $50,000.Use the "Present Value Formula", which computes how much money you need to start with now to achieve the desired monetary goal. Assume you will find an investment that promises somewhere between 5% and 10% interest on your money (you choose the rate) and pretend you want to purchase your desired item in 12 years. (Remember that the higher the return, usually the riskier the investment, so think carefully before deciding on the interest rate.) How much do you need to invest today to reach that desired amount 12 years from now?

In looking into choosing a specific scenario I have decided to use the amount that would be needed for lawn equipment of $5000. The annual interest rate would be set at 6%, while using the excel present value formula wizard will provide an equation of =PV(6%,12,0,5000,0). Reviewing the equation, PV is the present value, 6% would be considered the interest rate, the number 12 is the number of interest payments, and 0 indicates that the payment is made at the end of each specific period. So, when solving for PV, the amount initially that would be needed for the investment is $2,484.85. Bellow are illustrated the breakdown of how the interest is accrued annually in a 12-month period of the investment.

Beginning BalanceInterest @ 6%Ending BalanceEnd of Year

$2,484.85$149.09$2,633.941

$2,633.94$158.04$2,791.982

$2,791.98$167.52$2,959.503

$2,959.50$177.57$3,137.074

$3,137.07$188.22$3,325.295

$3,325.29$199.52$3,524.816

$3,524.81$211.49$3,736.307

$3,736.30$224.18$3,960.478

$3,960.47$237.63$4,198.109

$4,198.10$251.89$4,449.9910

$4,449.99$267.00$4,716.9911

$4,716.99$283.02$5,000.0112

• You wish to leave an endowment for your heirs that goes into effect 50 years from today. You don't want to be forgotten after you pass so you wish to leave an endowment that will pay for a grand soire yearly and forever. What amount would you like spent yearly to fund this grand party? How much money do you have to leave to your heirs 50 years from now assuming that will compound at 6% interest? If you have.

In answering this question, I have chosen to use an investment of a tangible reason which what I am able to afford. So, the amount would be $50 a month or $600 annually. Illustrated below I have provided the solution.

Data received:

Time period (t) = 50 years

Interest rate (i) = 6%

Required Data:

Future value of annuity (FVA) = ?

Annual Payment (A) = $600

Perpetuity = ?

Known:

The amount paid annually is $600, so:

FVA = $600 x (("1+0.06") ^ "50" "-1") / "0.06"

FVA = $600 x ((1.06)^50-1/0.06

FVA $600 x (18.42-1)/0.06 FVA=$600 x 17.42/0.06

FVA = $600 x 290.33 FVA = $1741.98

To calculate the amount of money to spend each year in perpetuity, illustrated below is the formula.

Perpetuity = A/t

Perpetuity = 600/0.06

Perpetuity = $10000

The conclusion is that I would have an endowment of $174, 198 of which would fund a $10,000 annual party in perpetuity.

Brian Wethy

References:

Byrd, J., Hickman, K., & McPherson, M. (2013). Managerial finance [Electronic version]. Retrieved from https://content.ashford.edu/

Hi Mr. Wethy,

Good job on the present value.

On the soiree, you have to calculate the perpetuity first and then the annuity. Please review the video?

https://www.youtube.com/watch?v=z-eyqJLRew0