Recently, I had to choose between opening a savings account and a certificate of deposit (CD). The savings account offered 1.05% of interest and the CD, 2.75%. I had to compare both investments in a 5-year horizon in order to reach the achieved calculation.
In this case, I relied on the Future Value (VF); which is the value that will have in the future a certain amount of money that we maintain today or that we decide to invest in a certain project. Future Value (VF) allows us to calculate how the value of the money we have today (today) will be modified considering the different investment alternatives available to us.
In order to calculate the VF, we need to know the value of our money is the current moment and the interest rate that will be applied in the coming periods.
Future Value is used to evaluate the best alternative as to what to do with our money today. Also to see how the value of money changes in the future.
The first alternative has an FV of $5,268.07, while the second alternative offered an FV of $5,726.37. The FV of the CD is greater than the savings account; as a result, it means a more attractive investment than the alternative.
Explanation:
Task 2
?Determine the present value of $75,000 discounted at 6% over 6 years.
FV= $75,000
Rate= 6%
Period= 6 years
PV = $52,872.04
Determine the future value of $100,000 invested today at 4% for 5 years.
FV = $121,665.29
Rate= 4%
Period= 5 years
PV = $100,000
Determine what monthly payment will need to be invested if you have $10,000 today and want it to grow to $100,000 over 20 years at 4.5%.
Monthly payment = $193.66
PV= $10,000
FV= $100,000
Period= 20 years
Rate= 4.5%
References
Patnaik, P. (2009). The value of money.
Staff, I. (2018, March 6). Time Value of Money - TVM.
INSTRUCTOR:
Task 2:
=PV(0.06,6,0,75000)
What would be the formula if the interest rate were compounded monthly?