2 How do we approach this problem? For each problem, identify the formula and process you would use.FV = Future ValuePV = Present ValueA = Annuity payment/receiptClick for answers within each frame
3 You invest $9,000 today at 9%. What will you have in the bank after 2 years? (Click for answer)This is Future Value because you are looking for what an amount today will be worth in the future. You would use the FV = PV x FVIF formulaFVPVA
4 Jean Spilicing will receive $8,000 a year for the next 15 years from her trust. If a 7 percent interest rate is applied, what is the value of the payments?This is Present Value of an Annuity, because you are looking for the current value of a future stream of payments. You would use the PVA = A x PVIFA formula
5 The Clearinghouse Sweepstakes has just informed you that you have won $1 million. The amount is to be paid out at the rate of $20,000 a year for the next 50 years. If a 10% rate is applied, should she be willing to sell out her future rights now for $160,000?This is Present Value of an Annuity, because you are looking for the current value of a fturue stream of payments. You would use the PVA = A x PVIFA formulaPVA
6 Your uncle offers you a choice of $30,000 in 50 years or $95 today Your uncle offers you a choice of $30,000 in 50 years or $95 today. If the money is discounted at 12 percent, which should you choose?You want to bring the two dollar amounts to the same time frame. Because you’re given the interest rate for discounting, that implies that you want to bring the 30,000 back to today's value. So use PV = FV x PVIF
7 Jim Thomas borrows $70,000 toward the purchase of a home at 12 percent interest. His mortgage is for 30 years. How much will his annual payment be?This is looking for today’s value of payments into the future. So that would be the present value of annuity payments. You would use the PVA = A x PVIFA formula. You would know that PVA of 70,000 and the interest factor of 30 years and 12 percent, so you would solve for the annuity payment.Annuity consideration – find amount of payment with PVA = PVA/PVIFA
8 Mr. Nailor invests $400 each month in the bank at 4% interest, which is compounded quarterly. At the end of ten years, what will Mr. Nailor’s investment be worth?This is asking what the value of payments will be worth in the future. That is Future Value of an Annuity, so you would use FVA = A x FVIFA formula.
9 Frank Bell has just retired from the telephone company Frank Bell has just retired from the telephone company. His total pension funds have an accumulated value of $200,000 and his life expectancy is 16 more years. His pension fund manager assumes he can earn a 12 percent return on his assets. What will be his yearly annuity for the next 16 years?We have a pool of money today, and are looking at today’s value of payments that go into the future. So that would be the present value of an annuity. You would use the PVA = A x PVIFA formula. You would know that PVA of 200,000 and the interest factor of 16 years and 12 percent, so you would solve for the annuity payment.A = PVA/PVIFA
11 Three MethodsPaybackInternal Rate of ReturnNet Present Value
12 Clues for Internal Rate of Return Clues for PaybackWhich alternative would you select under the payback period?At what point would the purchase pay for itself?Clues for Internal Rate of ReturnCost of capital is x%What is the return?
13 Clues for Net Present Value Cost of capital or discount percentageWhat is the value of the project?