Time Value of Money

David plans to retire at age 62 (which is in 40 years). David likes to fish and upon retirement he plans to buy a cabin in the mountains
which he estimates will cost him $200,000. He also estimates that to live comfortably in retirement, he will need to withdrawl $90,000 at
the start of each year, which he believes he will need until age 85 (i.e. 23 years of withdrawls). When he retires, he plans to purchase the
cabin, then place the remaining balance into an account that pays 4 percent interest.

1. What amount will David need at retirement (at age 62) in order to have enough money to buy the cabin and make the annual
withdrawls indicated above?
2. If David's first payment is made at the end of this year, and his last payment is made the day he retires, how much money must he
contribute each year to his retirement fund, if the fund pays 7.5% interest until retirement?
3. If David is able to save $10,000 a year, what interest will he have to earn over the next 40 years to produce the same amount he
needs to fund his retirement?
4. Part A - If David's rich uncle gave him $75,000 today and he invested it in a fund that pays 7.5% interest would it be enough to fund
his retirement? Part B - if $75,000 is not enough, what amount would be needed?

1 Amount needed at retirement

PV $1,390,600.38
n 4%
m 23
i 1
pmt -90000
FV

Add cabin $200,000

Part 1 Total needed to retire $1,590,600.38

2 PV
n 40 40
m 1 12
i 7.50% 7.50%
pmt $6,999.14 $526.02
FV $1,590,600.38 $1,590,600.38

3 PV
n 40
m 1
i 6.11%
pmt -10000
FV $1,590,600.38

4a
PV -75000
n 40
m 1
i 7.50%
pmt
FV $1,353,317.92 No, it is not enough

4b PV $88,150.04
n 40
m
i 7.50%
pmt
FV $1,590,600.38
ntains
0,000 at
chase the

ust he

t he

o fund
 What would you have to put into an account at the birth of your baby in order to have enough
money to pay for the first year of college exactly 18 years later if you could get a 9% return on
your investment? The first year of college currently costs $22,000 and will increase by 4%
each year.

1
PV -22000
n 18
m
i 4%
pmt
FV $44,567.96

2
PV $9,448.13
n 18
m
i 9%
pmt
FV $44,567.96
 You borrow $250,000 to buy a house and the interest rate is 4.75% for a 30-year loan. What is your monthly
payment? If interest rates go to 5.5%, how much can you borrow and still have the same payment?

The starting abount of a loan is under PV

1
PV -250,000
n 30
m 12
i 4.75%
pmt $1,304.12
FV

2
PV 229,684
n 30
m 12
i 5.50%
pmt $1,304.12
FV
 You plan to buy property in Florida five years from today. To do this, you estimate that you will need $30,000 at that
time for the purchase. You would like to accumulate these funds by making equal annual deposits in your savings
account, which pays 10 percent annually. If you make your first deposit at the end of this year, and you would like
your account to reach $30,000 when the final deposit is made, what amount do you need to deposit annually?

What if you waited until seven years from today and were willing to make the same annual deposits. How much
would you have at the end of seven years for a property purchase?

1
PV
n 5
m
i 10%
pmt $4,913.92
FV 30000

2
PV
n 7
m
i 10%
pmt $4,913.92
FV $46,619.24
 Calvin Johnson has a $5,000 debt balance on his Visa card that charges 12.9% APR compounded monthly. In
2018 Calvin's minimum monthly payment is 3 percent of his debt balance, which is $150. How many months
(round up) will it take Calvin Johnson to pay off his credit card if he pays the current minimum payment of $150
at the end of each month? Also, what if Calvin stepped up his monthly payments to $200 at the end of each
month, how long wold it take to pay off his credit card?

1
PV $5,000
n 41.49459 42 months 3.5 years
m 12
i 12.90%
pmt ($150)
FV

2 PV $5,000
n 29.27249 2.44 years
m 12
i 12.90%
pmt ($200)
FV
 monthly. In
many months
yment of $150
end of each
Based on the effective interest rates, would you prefer to deposit your money into San Diego County
Credit Union which pays 8.0% interest compounded quarterly, or into Nelson's Bank, which pays
7.8% compounded monthly?

i 8%
m 4
EAR 8.24% Prefer SDCU

i 7.80%
m 12
EAR 8.08%
Prepare a balance sheet and income statement for the below company from the following scrambled list of items.

Depreciation expense $66,000 A = L +E

Cash $225,000
Long-term debt $334,000
Sales $573,000
Accounts Payable $102,000
General and Administrative expense $79,000
Buildings and equipment $895,000
Notes payable $75,000
Accounts Receivable $167,500
Interest expense $4,750
Accrued expense $7,900
Common stock $289,000
Cost of goods sold $297,000
Inventory $99,300
Taxes $50,500
Accumulated depreciation $263,000
Taxes payable $53,000
Retained earnings $262,900