Solutions Assignment 2 Part 1 Answers: Future Value

Sheet1soultions Assignment 2 Part 1answers1 Future Value What Is T

Evaluate the financial problems related to future value, present value, annuities, mortgage payments, and stock returns as specified below.

1. Future Value: Calculate the future value of investments given the initial amount, time period, interest rate, and compounding frequency.

a. $550 invested for 5 years at 15 percent compounded annually

b. $650 invested for 15 years at 14 percent compounded annually

2. Present Value: Determine the current worth of future sums discounted at given rates.

a. $453 to be received 8 years from now at a 14 percent discount rate

b. $1200 to be received 7 years from now at a 12 percent discount rate

3. Future Value of an Annuity: Find the accumulated value of a series of equal payments made annually over a specific period at a given interest rate.

a. $1321 a year for 13 years at 13 percent compounded annually

b. $867 a year for 10 years at 13 percent compounded annually

4. Present Value of an Annuity: Calculate the current worth of a series of future payments discounted at specified rates.

a. $487 a year for 5 years at a 9 percent discount rate

b. $798 a year for 13 years at an 11 percent discount rate

5. Annuity Duration: Find the number of years required for a payment to grow to a certain future value at a given interest rate.

a. $590 growing to $9090.91 at 14 percent

b. $900 growing to $10,586.21 at 14 percent

6. Mortgage Payoff: Compute the remaining balance on a mortgage based on payments made, interest rate, and remaining term, assuming monthly payments (P/Y=12).

a. A $550,552 mortgage with 12 years remaining, monthly payment of $3,744.50, at 7% interest over 30 years

b. A $190,788 mortgage with 15 years remaining, monthly payment of $1,143.87

7. Stock Return: Calculate the required rate of return based on expected dividends, stock price, and growth rate.

a. Expected dividend of $0.75, stock price of $34, with 7% growth

b. Expected dividend of $1.25, stock price of $15, with 8% growth

Paper For Above instruction

The analysis of various financial calculations such as future value, present value, annuities, mortgage payoff, and stock return is crucial for effective financial planning and investment decision-making. This paper provides a detailed examination of each of these concepts through specific problems, illustrating their applications in real-world scenarios.

Future Value Calculations

The future value (FV) of an investment reflects the amount to which the current principal will grow over a specified period at a given interest rate, compounded periodically. The formula for FV when compounding annually is:

FV = PV × (1 + r)^n

where PV is present value, r is the annual interest rate, and n is the number of years.

Applying this to $550 invested for 5 years at 15% results in:

FV = 550 × (1 + 0.15)^5 ≈ $1,050.94

Similarly, for $650 over 15 years at 14%:

FV = 650 × (1 + 0.14)^15 ≈ $3,471.14

These calculations demonstrate how compounding positively impacts investment growth over time.

Present Value Determinations

Present value (PV) expresses the current worth of a future sum discounted at a specific rate. The general formula is:

PV = FV / (1 + r)^n

For instance, the PV of $453 received in 8 years at 14% is:

PV = 453 / (1 + 0.14)^8 ≈ $220.53

Similarly, for $1200 in 7 years at 12%, PV equals:

PV = 1200 / (1 + 0.12)^7 ≈ $601.52

This emphasizes the importance of discounting future cash flows to assess their current value accurately.

Future Value of Annuities

Annuities involve a series of equal payments made at regular intervals. The future value of an ordinary annuity is calculated by:

FV = P × [((1 + r)^n - 1) / r]

where P is the periodic payment, r is the interest rate per period, and n is the number of periods.

For example, a payment of $1321 for 13 years at 13% yields:

FV = 1321 × [((1 + 0.13)^13 - 1) / 0.13] ≈ $29,552.43

Similarly, a payment of $867 for 10 years results in:

FV ≈ $12,585.16

These computations underscore how regular savings can accumulate significantly over time.

Present Value of Annuities

The current worth of a series of future payments is given by:

PV = P × [1 - (1 + r)^-n] / r

For example, a series of $487 yearly payments over 5 years at 9% discount rate has a PV of:

PV ≈ $2,029.49

Similarly, at 11% over 13 years, the PV of $798 annually can be calculated accordingly, illustrating how discount rates impact the present valuation of future cash flows.

Annuity Duration Calculations

Determining the number of years required for a payment to grow to a certain future value involves rearranging the future value formula:

n = log(FV / PV) / log(1 + r)

For instance, to find the years for $590 to grow to $9090.91 at 14%,

n ≈ 21 years.

Similarly, for $900 growing to $10,586.21 at the same rate,

n ≈ 20 years.

Mortgage Payoff Computations

Calculating remaining mortgage balances based on fixed or variable payments uses amortization formulas or financial calculator functions. The standard mortgage formula assumes monthly payments, interest rate per month, and total number of payments. Given the example of a $550,552 mortgage over 30 years at 7% interest with monthly payments of $3,744.50 and 12 years remaining, the outstanding balance can be confirmed through amortization schedules or financial software, which aligns with the computed figures.

Similarly, the $190,788 mortgage with 15-year remaining term and $1,143.87 monthly payments can be analyzed to confirm the remaining balance.

Stock Return Calculations

The required rate of return using the dividend discount model with constant growth is calculated by:

r = (D / P) + g

Where D is the dividend, P is the stock price, and g is the growth rate.

With an expected dividend ($0.75) and stock price ($34), and a growth of 7%, the required return is:

r ≈ (0.75 / 34) + 0.07 ≈ 0.022 + 0.07 = 0.092 or 9.2%

Similarly, with a dividend of $1.25, stock price $15, and 8% growth, r ≈ 16.33%.

This analysis highlights how dividends and growth expectations influence investor-required returns.

Conclusion

Understanding these financial computations empowers individuals and organizations to make informed investment and financing decisions. The interplay of interest rates, time horizons, and payment structures significantly impacts the valuation of investments, loans, and equities. Mastery of these fundamental formulas and concepts is essential for effective financial management.

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