1. Think of something you want or need for which you currently do not have the f

Question

1. 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?

2. 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 soirée 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? Assuming that you have not invested anything today, how much would you have to invest yearly to fully fund the annuity in 50 years, again assuming a 6% monthly compounding rate?

Explanation / Answer

Here time horizon is 12 years and lets assume that thing which we want to buy costs $25000.(Future Value) and rate of interest on current investment be 8%.

Thus, FV=25000, n=12 years. i= 8%

Now we can use compound interest formula to get PV of FV

FV=PV*(1+i/100)^n

25000=PV*(1+8%)^12

=PV*2.51817

PV=9927.84

So one has to invest $9927.84 @8% for 12 years to get $25000

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