Time Value of Money Calculations
Weekly tasks or assignments (Individual or Group Projects) will be due by Monday, and late submissions will be assigned a late penalty in accordance with the late penalty policy found in the syllabus. NOTE: All submission posting times are based on midnight Central Time.
Your next assignment as a financial management intern is to apply the knowledge that you acquired while engaging in the time value of money discussion that you had with your colleagues. In this task, you will be building the foundation for a retirement plan using the concepts presented in this phase.
- First, you will need to estimate the future cost of 3 lifestyles assuming an inflation rate of 3% and the number of years before you turn 67 years old.
- Comfortable lifestyle current cost is approximately $100,000/year.
| PV of Life Style (Given) |
Average Rate of Inflation (RATE) |
Years to Retirement (NPER) |
Find FV of Life Style |
| $100,000 | 3.0% |
Next, you will need to estimate the 5-year average rate of return of the stock market (you should use the top 500 stocks, which can be researched at finance Web sites).
At this rate of return, how long would it take for an investment to double?
| Top 500 Stocks Value 5 yrs. ago (PV) | Top 500 Stocks Value Now (FV) | Number of Periods (NPER) | 5-Year Return on Top 500 Stocks (RATE) |
| 5 |
If an individual needed the following amounts to retire, how much would he or she have to invest today at the rate of return that you calculated in the previous step, assuming he or she will turn 67 in the same year you do?
$3,000,000
| FV of Account (Given) |
5-Year Return on Top 500 Stocks (RATE) |
Years to Retirement (NPER) |
Find PV of Investment |
| $ 3,000,000 |
Now, you will need to estimate the life expectancy of the retiree.
Use 90 years of age as an estimate.
Now, you can subtract the life expectancy of the retiree from 67 (the retirement age) and use the first of the 2 tables below to calculate the required amount at retirement to support the following lifestyles adjusted for inflation (hint: the inflation adjusted amounts will be the payment as you will be calculating the present value of this annuity using a rate of return of 12%)
Now, using the second table, you can calculate the annual contribution that needs to be made to have each required amount at retirement.
To determine the annual contribution, use the amount that you calculated above as the future value, the market rate of return from Phase 1 as interest rate, and number of periods as 67 minus your current age.
| FV of Life Style (PMT) | Given Expected Rate of Return (RATE) | Years in Retirement (NPER) | Required Value at Retirement (Find PV of Annuity) |
| 12.0% | 23 |
| FV of Account (Use PV of Annuity from above) | 5-Year Return on Top 500 Stocks (Rate) | Years to Retirement (NPER) |
Annual Contribution Required to meet goal (Find PMT) |
After completing the required calculations, explain your results in a Word Document and attach the spreadsheet showing your work. Be sure to explain the following:
-
- The difference between present and future values
- How the present value and future value calculations are calculated and related
- The difference between compounding and discounting
Note: You can find information about the top 500 stocks at this Web site.
Reference
S&P 500 index chart. (2014). Retrieved from the Yahoo! Finance Web site: http://finance.yahoo.com/echarts?s=%5egspc+interactive#symbol=^gspc;range=1y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=;
Be sure to document your paper with in-text citations, credible sources, and list of references used in proper APA format.
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