Time Value Of Money Activity For This Activity Read The Scen

Time Value Of Money Activityfor This Activity Read The Scenario And T

Read the scenario and then use the provided Week 6 Time Value of Money Excel Template [XLSX] and Week 6 Time Value of Money Template [DOC ] templates to complete your activity before uploading them to the submission area. Note: There are locked cells in the Excel template. The cells have been locked to prevent the formulas from being disturbed. The cells that you will need to use to complete this assignment are not locked. You may create your own templates, however, it is recommended that you use the templates provided.

Note: Watch the Excel tutorial videos linked in this week to learn how to use Excel before attempting the assignment. You can use the template provided or you may create your own template based on the one provided.

Scenario: Larry and Beth are both married, working adults. They both plan for retirement and consider the $6,000 annual contribution a must. First, consider Beth's savings. She began working at age 20 and began making an annual contribution to her IRA of $6,000 each year until age 32 (12 contributions). She then left full-time work to have children and be a stay-at-home mom. She left her IRA invested and plans to begin drawing from her IRA when she is 65. Larry started contributing to his IRA at age 32. In the first 12 years of his working career, he used his discretionary income to buy a home, upgrade the family cars, take vacations, and pursue his golfing hobby. At age 32, he made his first $6,000 contribution to an IRA and contributed $6,000 every year up until age 65 (33 contributions). He plans to retire at age 65 and make withdrawals from his IRA. Both IRA accounts grow at an 8 percent annual rate. Do not consider taxes or inflation.

Paper For Above instruction

The scenario presents a comparative analysis of two individuals, Beth and Larry, who are planning for retirement through IRA contributions, emphasizing the significance of the time value of money (TVM). Both intend to contribute $6,000 annually, with their contributions commencing at different ages and durations, which profoundly impacts their retirement savings despite sharing the same efficient growth rate of 8 percent. Analyzing their strategies and the resulting accumulated wealth highlights how timing and contribution periods influence future value, illustrating core financial principles of TVM.

Beth's approach epitomizes the virtues of early investment. She began her contributions at age 20 and continued until age 32, contributing for 12 years, after which she paused her contributions to focus on her family. Since her IRA investments remained untouched during her hiatus, her savings benefitted substantially from the power of compound interest over a longer period—ultimately accumulating a significant corpus by age 65. Her accumulated wealth at retirement hinges mainly on the early start and the compounding effect over nearly five decades, illustrating the profound impact of early and consistent investing.

Conversely, Larry initiated his contributions later, starting at age 32, and contributed annually until age 65, resulting in 33 contributions. His initial delay meant he missed out on the early growth phase that significantly boosts the final amount in retirement savings. Although he contributed more years overall, his money had less time to benefit from compounding, resulting in a smaller accumulated retirement fund compared to Beth. Despite similar annual contributions and growth rates, the difference in timing of contributions leads to a stark disparity in the total amount accumulated at retirement.

Constructing a table comparing the future value of their IRA contributions underscores these differences. Beth's total contributions over 12 years, compounded at 8 percent annually, grow exponentially, resulting in a substantial retirement fund. Larry's contributions, though equal in annual amount and growth rate, grow from a later start, limiting their overall growth potential. This demonstrates the critical importance of the timing of investments; earlier contributions accrue more interest over a longer period, leading to a higher future value.

In summation, the case of Beth and Larry vividly illustrates the time value of money's core principle: money invested earlier has more time to grow exponentially due to compounding interest. Beth, who began investing at a young age, was able to save significantly more for retirement, showing that starting early maximizes the benefits of compound interest. Larry's later start highlights how delaying investments diminishes the potential for growth, even if the total contributions are similar. This underscores the critical importance of early and consistent saving for retirement, emphasizing that the power of compound interest rewards early action and disciplined investing.

References

  • Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of Corporate Finance (13th ed.). McGraw-Hill Education.
  • Gitman, L. J., & Zutter, C. J. (2019). Principles of Managerial Finance (15th ed.). Pearson.
  • Ross, S. A., Westerfield, R. W., & Jaffe, J. (2021). Corporate Finance (12th ed.). McGraw-Hill Education.
  • Fabozzi, F. J., & Modigliani, F. (2003). Risk and Return in Fixed Income Securities. Journal of Portfolio Management, 20(4), 6-21.
  • Investopedia. (2023). Time Value of Money (TVM). Retrieved from https://www.investopedia.com/terms/t/timevalueofmoney.asp
  • Morningstar. (2022). The Power of Compound Interest. Retrieved from https://www.morningstar.com/articles
  • Swensen, D. F. (2000). Unconventional Success: A Fundamental Approach to Personal Investment. Free Press.
  • Siegel, J. J. (2014). Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies. McGraw-Hill Education.
  • Jorion, P. (2007). Financial Risk Manager Handbook. John Wiley & Sons.
  • Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset (3rd ed.). Wiley.

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