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Time value of the money – Financce

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Deliverable Length: Word document of 700–1,000 words with attached Excel Spreadsheet showing calculations

Be sure to document your
paper with in-text citations, credible sources, and list of references used in
proper APA format.

Your next assignment as a financial management intern is to apply
the knowledge that you acquired while engaging in the time value of money
discussion that you had with your colleagues. In this task, you will be
building the foundation for a retirement plan using the concepts presented in
this phase.

  • First, you will need to estimate the future cost of 3 lifestyles
    assuming an inflation rate of 3% and the number of years before you turn 67
    years old.

    • Comfortable
      lifestyle current cost is approximately $100,000/year.

PV of Life Style
(Given)

Average Rate of Inflation
(RATE)

Years to Retirement
(NPER)

Find FV of Life Style

  $100,000

3.0%

  • Next, you will need to estimate the 5-year average rate of return
    of the stock market (you should use the top 500 stocks, which can be researched
    at finance Web sites).

    • At this
      rate of return, how long would it take for an investment to double?

Top 500 Stocks Value 5
yrs. ago (PV)

Top 500 Stocks Value Now
(FV)

Number of Periods (NPER)

5-Year Return on Top 500
Stocks (RATE)

5

  • If an individual needed the following amounts to retire, how much
    would he or she have to invest today at the rate of return that you calculated
    in the previous step, assuming he or she will turn 67 in the same year you do?

    • $3,000,000

FV of Account
(Given)

5-Year Return on Top 500
Stocks
(RATE)

Years to Retirement
(NPER)

Find PV of Investment

$ 3,000,000

  • Now, you will need to estimate the life expectancy of the retiree.

    • Use 90
      years of age as an estimate.

  • Now, you can subtract the life expectancy of the retiree from 67
    (the retirement age) and use the first of the 2 tables below to calculate the
    required amount at retirement to support the following lifestyles adjusted for
    inflation (hint: the inflation adjusted amounts will be the payment as you will
    be calculating the present value of this annuity using a rate of return of 12%)

  • Now, using the second table, you can calculate the annual
    contribution that needs to be made to have each required amount at retirement.

    • To
      determine the annual contribution, use the amount that you calculated above as
      the future value, the market rate of return from Phase 1 as interest rate, and
      number of periods as 67 minus your current age.

FV of Life Style (PMT)

Given Expected Rate of
Return (RATE)

Years in Retirement
(NPER)

Required Value at
Retirement
(Find PV of Annuity)

12.0%

23

FV of Account (Use PV of
Annuity from above)

5-Year Return on Top 500
Stocks (Rate)

Years to Retirement
(NPER)

Annual Contribution
Required to meet goal (Find PMT)

  • After completing the required calculations, explain your results
    in a Word Document and attach the spreadsheet showing your work. Be sure
    to explain the following:

    • The
      difference between present and future values

    • How the
      present value and future value calculations are calculated and related

    • The
      difference between compounding and discounting

      Note: You can find information about the top 500 stocks at this Web site.

      Reference

      S&P
      500 index chart
      . (2014). Retrieved from the Yahoo! Finance Web site:
      http://finance.yahoo.com/echarts?s=%5egspc+interactive#symbol=^gspc;range=1y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=;

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