ACCT 3001 Lecture Notes - Lecture 4: Junkers F.13, Sears, Savings Account

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4 Dec 2017

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Ifrs questions are available at the end of this chapter. Answer a d b a c d b b a d c c b c c a. Multiple choice conceptual (cont. ) a c a d d a d c a c b d d b c c b c b b b b c c d. Future value of 1 and present value of 1 relationship. Determine the timing of rents of an annuity due. Factors of an ordinary annuity and an annuity due. Identification of a future value of an ordinary annuity of 1. Present value of an ordinary annuity and an annuity due. Difference between an ordinary annuity and an annuity due. Present value of ordinary annuity and present value of annuity due relationship. P these questions also appear in the problem-solving survival guide. S these questions also appear in the study guide. Calculate a future value of an annuity due.

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Part I:
Solve 4 of the following time value of money problems by filling inthe 4 columns to the right of the description.
Be sure to solve 1 problem from each of the following 4 categorieslisted under Problem Types. I have completed the first row as anexample.

Part II:
Discuss how you may use time value of money concepts in yourpersonal life. For example, saving for college tuition orretirement, paying off a car loan or home mortgage. Give specificdetails as to how you would use these formulas for more effectivedecision making. Create 1 description and fill in the table foryour newly created question.

Problem Types:
1 pv = present value of $1
2 fv = future value of $1
3 PVAo = Present Value of an Ordinary Annuity of$1 (payment at end of period)
4 FVAo = Future Value of an Annuity of $1(payment at end of period)

	Description	Type of Problem	Table	Formula	Answer
1	How much money must your rich unclegive you now to finance four years of college, assuming an annualcost of $48,000 and an interest rate of 6% (applied to theprincipal until disbursed)?	Present Value of anordinary Annuity	PVAo	PV = 48,000(3.465)	$166,325.07
2	How much interest would you earn ifyou deposited $300 at 6 percent for 27 months?
3	If you deposit $2,000 in a 5-yearcertificate of deposit at 5.2%, how much will it be worth in fiveyears?
4	How much interest would you pay toborrow $670 for eight months at 12 percent?
5	You wish to borrow $18,000 to buy anew auto-mobile. Rate is 8.6% over five years with monthlypayments. Find the monthly payment.
6	What is the future value of $800 at8 percent after six years?
7	How much would you have in savingsif you kept $200 on deposit for eight years at 8% compoundedsemiannually?
8	You choose to invest $50/month in a401(k) that invests in an international stock mutual fund. Assumingan annual rate of return of 9%, how much will this fund worth ifretiring in forty years?
9	What is the future value of anannual deposit of $230 earning 6 percent for 15years?
10	If you invest $600/Year in a 401(k)that invests in an international stock mutual fund. Assuming anannual rate of return of 9%, how much will this fund worth ifretiring in forty years?
11	What amount would you have in aretirement account if you made annual deposits of $375 for 25 yearsearning 12 percent, compounded annually?
12	What is the present value of $2,200earning 15 percent for eight years?
13	How much money must you set asideat age 20 to accumulate retirement funds of $100,000 at age 65,assuming a rate of interest of 7%?
14	To have $6,000 for a childâseducation in 10 years, what amount should a parent deposit in asavings account that earns 12 percent, compoundedquarterly?
15	If you deposit $2,000 in a 5-yearcertificate of deposit at 5.2% with quarterly compounding, how muchwill it be worth in five years?
16	What is the present value of awithdrawal of $200 at the end of each year for 14 years with aninterest rate of 7 percent?
17	How much would you have to depositnow to be able to withdraw $650 at the end of each year for 20years from an account that earns 11 percent?
18	What would be the annual paymentamount for a $20,000, 10-year loan at 7 percent?

ochremallard624

to calculate present value of $1 chart 6-4 discount rate NOTANNUITY CHART

this is chart 6-5 to calculate present value of an ANNUITY of a1 discount rate

problem:

Just yesterday I posted a key question as to why the statelottery might hypothetically offer you an upfront lump-sum paymentof $50 million or an ongoing annuity of a $5 million check eachyear for 20 years (totaling $100 million in checks). Remember thatthis was just my simplified hypothetical example. A few peopleattempted the answer to this further above, but here's what'sreally going on...it has to do with Net Present Value (NPV). It'sbecause future-year dollars are worth less, and the further you gointo the future, the less those dollars are worth in terms oftoday's dollars. And that is why, when financial analysts look at adecision involving multi-year cash flows, they will use discountfactors to convert all of the future-year dollars to present value(i.e., this year's dollars) and add them up to yield the NPV of allof the amounts to put a final answer in terms of today's value.Where do these discount factors come from? They're derived from thereciprocal of the famous compound interest formula, but you justneed to go and look at two tables in your textbook in Chapter 12,Appendix 12A, Table A (present value of $1 due in n periods) andTable B (present value of an annuity of $1 per period). Class, Icannot stress to you enough how widely-used this concept is, andthe importance of understanding how these discount factors areapplied to solve for net present value (NPV) and a related metric,internal rate of return (IRR). You will likely need to read, andreread, Chapter 12 and closely walk through some textbook exampleswhere each year's cash flows are multiplied by the appropriatediscount factor to convert all of that money into this year'sdollars (present value). We are surrounded by this financialanalysis methodology when faced with a decision on a lotterypayout, a retirement payout (lump sum versus annuity), and many ofour states and cities right now are dealing with issues relating tothe calculation of NPV in assessing whether they currently haveenough money in the appropriate accounts to meet the futureretirement payment obligations they've made to their publicemployees. This is an economic issue that has been on the brink ofexploding for a long time (don't take my word for it, it's beendiscussed in multiple articles in the NY Times, Wall StreetJournal, The Economist), but I'm not going to add all of that intothis discussion here. Let's learn to walk before we try to run.Would you like to see how the lottery payouts I described would bemultiplied by each year's financial discount factor? Just take alook at my attached Excel workbook, and note that there are threetabs: the first assumed a 0% cost of capital (no financialdiscounting done), the second assumed a 5% cost of capital, and thethird sheet inserted a 10% cost of capital. You'll see how thesedifferent interest rates changed the discount factor multipliersand ultimately changed the NPV of each alternative (the value ofthe lump sum or the annuity, all shown in present value). Also,this example just shows money moving one way (i.e., to the state,it's cash out of their pocket...to the lottery winner, it's cashinto their pocket). In many NPV and IRR examples, money will moveboth ways over multiple years...cash flows that are expenses orinvestments are outflows and are shown as negative, while revenuesor other incoming money are inflows and are shown as positive.Please look closely at my attached Excel workbook (all three tabs)and also walk through all of the examples in the chapter showinghow to do NPV and IRR problems. There are also examples in the textof simpler metrics including payback period and accounting rate ofreturn. It's typically very hard stuff for students to master. Now,for those of you who've looked at the chapter examples, maybeyou've figured this out already:

1. What is the key difference between Tables A and B in Chapter12, Appendix 12A, and how and when are each of them used in ananalysis?

2. What do we mean by âYear 0â in a financial analysis? Whatvalue do we use for the discount factor or multiplier for the cashflow in Year 0 of a financial analysis?

ACCT 3001 Lecture Notes - Lecture 4: Junkers F.13, Sears, Savings Account

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