Purpose Of Assignment: The Purpose Of This Assignment 546608

Purpose Of Assignmentthe Purpose Of This Assignment Is To Allow The St

The purpose of this assignment is to allow the students to understand and practice the measurement of present value, future value, and interest rate using Microsoft® Excel®. Students are required to perform various time value of money calculations using Excel, focusing on real-world financial problems involving compound interest, discounting, investment returns, property valuation, and salary growth projections.

Paper For Above instruction

Time value of money (TVM) is a fundamental financial concept that recognizes the value of money changes over time due to its potential earning capacity. This principle underpins investment decisions, valuation, and personal financial planning. This paper explores the practical applications of TVM calculations using Microsoft Excel, addressing specific problems related to compound interest, present and future value, investment returns, property valuation, and salary growth projections.

Calculating Future Value of Savings

The first problem involves calculating the future value of an initial deposit in a savings account with annual compounding interest. Suppose an individual deposits $8,592.00 into an account with an annual interest rate of 7.5%. The question asks: how much will the deposit grow to after 9.5 years? To solve this, the future value (FV) formula is used, which is:

FV = PV × (1 + r)^n

Where PV is the present value or initial deposit ($8,592), r is the annual interest rate (7.5% or 0.075), and n is the number of years (9.5). Using Excel, the calculation can be performed directly using the FV function or formula syntax:

=FV(0.075, 9.5, 0, -8592)

This computation enables students to see how compound interest accumulates over time and understand the importance of time horizon and interest rates on investment growth.

Present Value of a Future Sum

The second problem involves determining the present value (PV) of a future sum of money. Here, $992 is to be received after 13.5 years, with a discount rate of 3.5%. The PV formula is:

PV = FV / (1 + r)^n

In Excel, the present value can be calculated using the PV function or by directly applying the formula:

=PV(0.035, 13.5, 0, -992)

This calculation demonstrates the concept of discounting future cash flows to their present value, which is essential for investment analysis and financial decision-making.

Investment Return Calculation

The third problem assesses the return on investment in stocks. An individual buys stock at $45 and sells it after 15 years for three times the original purchase price. The final sale price is:

Selling Price = 3 × $45 = $135

The total return is calculated as:

Return = (Selling Price - Purchase Price) / Purchase Price

which in this case is:

Return = ($135 - $45) / $45 = 2 or 200%

This represents a 200% total return over 15 years, and the annualized return can be computed using the compound annual growth rate (CAGR) formula:

CAGR = (End Value / Start Value)^(1/n) - 1

Substituting the values:

CAGR = (135 / 45)^(1/15) - 1 ≈ 0.077 or 7.7% annually

This example emphasizes the importance of understanding investment growth rates over time.

Real Estate Valuation Over Time

The fourth problem considers purchasing a house for $3,250,000 to repurpose as a nursing home in nine years. The decision interval involves whether to proceed or sell it at that time, considering an expected 1.5% annual increase in real estate values. The future value of the property is:

Future Value = Present Value × (1 + growth rate)^n

=3250000 * (1 + 0.015)^9

Using Excel, this formula provides an estimate of the property's value in nine years, informing strategic choices about holding or selling the asset.

Salary Growth Projection

The final problem projects the salary needed for a daughter to meet her goal of earning $215,000 in 23 years, assuming an annual salary growth rate of 4.45%. The present salary (P) needed today can be derived from the future value formula rearranged as:

P = Future Value / (1 + growth rate)^{n}

In Excel, the calculation is:

=215000 / (1 + 0.0445)^23

This calculation illustrates how to determine initial investment or income starting points based on future financial goals, emphasizing the importance of compound growth in planning.

Conclusion

Financial decision-making relies heavily on understanding the time value of money. Excel provides accessible tools—such as FV, PV, and CAGR functions—that facilitate these calculations. By mastering these techniques, individuals and professionals can make informed investment, savings, and strategic real estate decisions, leveraging the power of compound interest and discounting principles to optimize financial outcomes.

References

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  • Hull, J. C. (2018). Options, Futures, and Other Derivatives. Pearson Education.
  • Kahle, L., & Kulatilaka, N. (2011). Corporate Investment and Valuation. Harvard Business Review.
  • Ross, S. A., Westerfield, R., & Jaffe, J. (2016). Corporate Finance (11th ed.). McGraw-Hill Education.
  • Solomon, E. (2017). The Money Book for the Young, Fabulous & Broke. Wiley.
  • Van Horne, J. C., & Wachowicz, J. M. (2018). Fundamentals of Financial Management (14th ed.). Pearson.
  • Weygandt, J. J., Kieso, D. E., & Kimmel, P. D. (2019). Financial Accounting (11th ed.). Wiley.
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