Personal finance 3
Personal finance 3 AAEC 2104
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This 6 page Class Notes was uploaded by Savah Notetaker on Friday September 16, 2016. The Class Notes belongs to AAEC 2104 at Virginia Polytechnic Institute and State University taught by Dr. White in Fall 2016. Since its upload, it has received 6 views. For similar materials see Personal Financial Planning in AAEC at Virginia Polytechnic Institute and State University.
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Date Created: 09/16/16
Personal Finance Time Value of Money $1 today is worth more than $1 in the future 3 main reasons to take money today (RIO) Risk: may not receive money Inflation: increase in general price level Opportunity cost: can do things with $1 today Types of Problems Future Value (lump sum) Present Value (lump sum) Annuities and loan payments o Constant streams of cash flow (per month, per year) Future value of Annuities Present value of Annuities Perpetuities *Lump sum: 1time investment of cash The Chart N= # of periods I= Interest rate PMT= payments PV= Present Value FV= Future Value END/BGN= on the calculator On TI84 calculator press apps TVM solver Alpha enter You can also use and app on the phone. I use Financial Calculator (it’s free!!) Money leaving= Money going in= + Compound interest interest on top of interest (airplane gaining altitude) Example problems 1. You deposit $2,000 into a retirement account that earns 6% annual return. How much will you have in your account at the end of 5 years (use END)? N=5 I=6 PV=2000 PMT=0 (there is no payments being made) FV=X (what we are solving for) Answer: $2,676 (answer may vary depending on rounding and decimal point, but this should be in the ball park) How much would you have after 20 years? (try this one on you own then see answer below) N=20 I=6 PV=2000 PMT=0 FV=X Answer: $6,414 What if the interest was compounded semiannually—how much would you have after 30 years? N= 30 X 2 = 60 (semiannually is every 6 months per year, which is where the 2 comes from. Same is with quarterly (4) and monthly (12)) I= 6/2 =3 (must divide the interest by the number of months per year, in this case 2) PV= 2000 PMT= 0 FV= X Answer: $11,783 2. You have $6,000 left over after taxes and you want to invest it. You are in the 15% marginal tax bracket. You want to know how much your money will grow over the next 10 years. Options: a. Invest the $6,000 in a Roth IRA funds will earn 9% annually. No tax implications. (this one is like the others so try it on your own) N= 10 I= 9 PV= 6000 PMT= 0 FV= X Answer: 14,204 b. Invest $6,000 in a taxable account that earns 9% before taxes. Earnings will be taxed each year N= 10 I= 9 X (100%15%)= 9 X 0.85= 7.65 PV= 6000 PMT= 0 FV= X Answer: 12,539 3. You have been offered $15,000 by a relative but it is only after 15 years. You are currently investing your money at 7% annually. What is this offer worth to you today? (what you would rather have in hand instead of waiting) N= 15 I= 7 PV= X PMT= 0 FV= 15,000 Answer: 5,436 4. You have $60,000 available for a down payment on a house and the end of 15 years. Your account earns 7%. How much do you need to invest per year to reach this goal? (BGN) N= 15 I= 7 PV= 0 PMT= X FV= 60,000 Answer: $2,387 How much do you need to invest per month to reach your goal? (try it on your own. The answer is below) N= 15 X 12 =180 I= 7/12 = 0.583 PV= 0 PMT= X FV= 60,000 Answer: $189/ month
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