Problem
A. Similar to last week, describe the steps involved on the financial calculator to answer this simple Future Value question: You deposit $2000 in a bank account that pays 5% interest per year. How much would there be in the account after 3 years? Also, of course provide the answer.
B. Similarly, explain how to use the Excel FV function to solve this similar problem: You deposit $5000 in a bank account that pays 5% interest per year. How much would there be in the account after 3 years? Also, of course provide the answer.
C. The process of finding a present value (PV) mirrors that of FV. After reading section 5.3 and any supplemental resources if needed, please explain how to use either Excel or a financial calculator, to solve this problem and provide the answer. Your eccentric (and controlling) Aunty Anne promises to give you $100,000 in 10 years if you do not smoke, vape, gamble or drink alcohol in the next 10 years. How much is that $100,000 that you will receive in 10 year's time worth today (PV), assuming a 5% discount/interest rate? Is the amount worth not drinking or smoking, or playing the lottery for 10 years :-)?
D. Explain the terms annuity, ordinary annuity, and annuity due.
E. As we have learned one of the main goals of financial management is to maximize value. The value of a business or for that matter any asset, including stocks and real estate, is determined by estimating the present value of expected future cash flows. Please read section 5.3 and the discuss the concepts of discounting, and opportunity costs, and as explained in section 5.3A and Figure 5.2 how $1M in 100 years could be worth a penny ($0.0121) today.
F. Calculating annuities - the present or future values of a series of cash flows is a variation on the future and present values you have already learned except with an annuity the number of payments (PMT) comes into play whereas in simple lump sum PV and FV calculations the PMT is 0. Similar to the Florida lottery example in section 5-9, in addition to winning the Florida lottery, you have also won the Colorado lottery (you are a very lucky person) and have a choice to make. You can either receive one payment of $20M ($20,000,000) today or $1.5M ($1,500,000) per year for the next 30 years. Which one should you choose, assuming that the current interest rate is 6%?
G. Explain the terms, nominal interest rate (INOM), annual percentage rate (APR), effective annual rate (EFF%) and equivalent annual rate (EAR), how they are similar and how they differ.
H. Explain what an amortization schedule is.