Examine Calculations And Reply To At Least Two Of Your Class

Examine Calculations And Reply To At Least Two Of Your Classmates Pos

Examine Calculations And Reply To At Least Two Of Your Classmates Pos

Examine calculations and reply to at least two of your classmates’ posts by adding recommendations to extend their thinking or posing questions to help them consider components they may have missed. The original posts discuss various financial calculations including present value, future value, annuities, and investment strategies related to home buying, college funding, and endowment planning. The discussions involve calculating the present value of a down payment needed for a house, funding a large party with annuities, calculating the amount to save for college expenses, and determining the funds required to support a perpetual endowment with annual payouts. The posts include formulas such as PV = FV / (1 + r)^n, and questions about annual investments needed to reach specific financial goals over 50 years. These concepts demonstrate understanding of fundamental financial mathematics, including compound interest, present value, and annuities, which are essential for effective financial planning and investment decision-making.

Sample Paper For Above instruction

Financial literacy and mathematical competence are vital skills for personal financial management, especially when making significant decisions such as purchasing a home, funding education, or establishing an endowment. The calculations provided in the classmate posts highlight fundamental concepts of financial mathematics, including present value (PV), future value (FV), and annuities, which are crucial tools in planning and decision-making.

In the first post, the student discusses the challenge of saving for a 20% down payment on a $250,000 house, equating to $50,000. They attempt to calculate the present value of this amount needed in 12 years with a 10% interest rate, presumably to determine how much they need to invest today to reach that goal. Their calculation indicates a present value of approximately $4,132.23, utilizing the formula PV = FV / (1 + r)^n. This demonstrates an understanding of discounting future sums to their present value, considering the effects of compound interest.

Further, the student considers how much would need to be spent annually to fund a party with a $10,000 budget over 50 years, assuming a 6% interest rate. They extend this to calculating the total amount to leave to heirs after 50 years, assuming 6% compound interest, resulting in a future sum. These calculations involve understanding of annuities and compound interest accumulation. However, the student’s approach to annual contributions appears simplified, and a more precise calculation would involve using the future value of an ordinary annuity formula: FV = P \* [((1 + r)^n - 1) / r], to determine the yearly investment needed to reach a specified future sum.

The second student discusses saving for college expenses totaling $35,000, with an 8% interest rate over 12 years. They correctly apply the present value formula to estimate how much needs to be invested today to meet this goal, arriving at approximately $11,152.08. Their mention of the present value formula indicates a solid grasp of discounting future expenses to their current equivalent, which is important for effective savings planning.

The discussion of establishing a perpetual endowment with annual payouts demonstrates understanding of perpetuity formulas. The student plans to leave $20,000, which, invested at 6% annually, would generate enough yearly income to fund a grand party forever. They correctly reference the perpetuity formula: PV = CF / r, where CF is the annual payout and r is the interest rate, illustrating how to maintain a sustainable endowment that supports ongoing expenses.

Overall, these calculations reflect a comprehensive understanding of core financial concepts, including discounted cash flow, annuities, and perpetuities. To enhance the calculations, consideration of inflation, unexpected costs, and varying interest rates could provide more realistic planning scenarios. Additionally, discussing the risks and assumptions involved in these calculations would deepen understanding, ensuring students recognize that financial outcomes depend on market conditions and personal circumstances.

References

  • Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.
  • Damodaran, A. (2010). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Wiley.
  • Hillier, D., Grinblatt, M., & Titman, S. (2010). Financial Markets and Corporate Strategy. McGraw-Hill Education.
  • Ross, S. A., Westerfield, R. W., & Jaffe, J. (2013). Corporate Finance. McGraw-Hill Education.
  • Kaplan, R. S., & Anderson, S. R. (2004). Time-Driven Activity-Based Costing. Harvard Business Review.
  • Sandford, J. (2020). Fundamentals of Financial Mathematics. Oxford University Press.
  • Ferguson, J. (2014). Personal Finance: Turning Money into Wealth. McGraw-Hill Education.
  • Frank, R., & Bernanke, B. (2015). Principles of Economics. McGraw-Hill Education.
  • Investopedia. (2023). Compound interest calculator. Retrieved from https://www.investopedia.com/calculator/compound-interest-calculator.aspx
  • Morningstar. (2023). Investing basics. Retrieved from https://www.morningstar.com/investing-basics/

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