# Time value of money

May 11th, 2015
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Stanford University
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Ignore taxes. Show your work. If you use Excel, show the formula with the parameters, and the answer. If you use a formula, provide the standard formula, the formula with terms substituted, and the answer. If you use a calculator, show the inputs and the answer. 1. Your daughter has just given birth to your first grandchild. You decide to start a college fund for the child. You want the fund to have \$300,000 in it when the child turns 18. You think you can get a return of 10% per year on your investment. How much should you deposit in the fund? 2.You want to buy a car. To do so, you will need to take out a loan in the amount of \$19,000. The longest you are willing to pay on the loan is five years. The interest rate on this type of loan is 5.0% per year. How much will the equal monthly payments be? 3. You have been diligently saving to buy a boat. For the last 10 years, you have been putting \$50 per month into a secret savings account paying .5% interest per year. You started wit

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Time value of moneySolution#1Present Value= Future cash flow (1+i)-nWe need \$300,000 in after 18 turns.Future value= \$300,000I= 10%n= 18PV= \$300,000 (1+10%)-18PV=\$53,957 We should deposit \$53,953 today to get \$300,000 after 18 turns with interest rate of 10%.Solution#2In this situation it is Annuity payments which are required to be paid for 5 years. Annuity payments are equally amounts of money required to pay for some certain period of time.PV= Annual cash flow* Annuity factorAnd we are required to find Annual cash flowsPV=\$19,000Annuity factor= [1-(1+i)-n /i] Where i= 10% and n= 5PV= Annual cash flows* [1-(1+10%)-5 /10%]\$19,000=Annual cash flows* 3.8 Annual Cash Flows= \$19,000/3.8Annual Cash Flows= \$5,000\$5,000 will be equally payments for 5 years to pay loan of \$19,000 with interest rate of 10%.Solution#3FV of annuity= annual cash flows* Ann

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