Time Value Of Money, Opportunity Cost, And Income Tax 301164

time Value Of Money Opportunity Cost And Income Taxes Worksheetscen

Use this simple savings calculator to complete Scenario 1: . You will enter the Initial Amount of Savings (Present Value), Annual Interest Rate (Rate of Return), and Number of Periods/Years into the calculator. The calculator will compute the Future Values. In this scenario you will look at the impact of interest rates on your savings.

Suppose that you have $2,000 of savings. You don’t anticipate needing to dip into these funds in the next five years. Based on the information provided in the table, calculate the future value (FV) of $2,000 at the end of years 1 and 5 if it were to be completely invested in each of the different cash management products. Enter your answers in the indicated cells of the table below. The Restrictions/Fees on Product Usage column relates to question 2 of Scenario 1.

Based on your calculations and on all you have learned this week, how would you choose to save your $2,000? Consider things such as rate of return, inflation, taxes, liquidity, safety, restrictions, and fees, and explain the rationale for your decision. Respond in at least 50 words. >Write response here.<

Scenario 2: Time Value of Money / Compounding Interest

Use this simple savings calculator to complete Scenario 2: . You will enter the Initial Amount of Savings (Present Value), Annual Interest Rate (Rate of Return), Interest Compounded, and Number of Periods/Years into the calculator. The calculator will compute the Future Values. In this scenario you will start with a big deposit and see how interest, compounding, and time will change the balance over time. Suppose that you inherit $10,000 from your late uncle. You save this money and do not deposit any more money to the account. Determine how much money you would have at the end of each of the periods for each of the scenarios in the table below, assuming that you don’t make any withdrawals from the account over the period.

Based on your calculations above, explain in your own words the impact of compounding interest. >Write response here.<

Scenario 3: Cost of Credit / Opportunity Cost / Trade-Offs

Suppose that you need $15,000 to buy a used vehicle. You have $7,500 in a money market fund earning 1.00% per year, but you are not sure you want to use any or all of that money. Using the tables in Exhibit 1-D, determine the total amount of payment due at the end of each year, dividing by 12 to estimate the monthly payment for each loan scenario. Also, calculate the total interest paid over the life of each loan. Show your work for opportunities to earn partial credit.

Based on the above, which loan option would you suggest for purchasing a vehicle? Justify your choice considering the total cost and personal financial situation. >Write response here.<

Summarize “opportunity cost” in your own words. How does the concept of opportunity cost apply to this decision? Explain in a brief paragraph. >Write response here.<

Income Taxes

Explain the differences between taxable income and adjusted gross income. >Write response here.<

In your own words, define tax deduction and tax credit. >Write response here.<

References

• Becker, W. E. (2018). Personal Finance. Pearson.
• Investopedia. (2020). Time Value of Money. https://www.investopedia.com/terms/t/timevalueofmoney.asp
• Fibich, G. (2020). Financial Calculations for Dummies. Wiley.
• U.S. Department of the Treasury. (2023). IRS Publications. https://www.irs.gov/publications
• Garman, E. T., & Forgue, R. E. (2017). Personal Finance. Cengage Learning.
• Thomas, R. (2019). The Basics of Sound Financial Planning. Harvard Business Review.
• Jiang, N. (2021). Understanding Compound Interest. Financial Analysts Journal.
• Senior, D. (2019). Fundamentals of Taxation. Routledge.
• Higgins, R. G. (2020). Principles of Finance. McGraw-Hill Education.
• Moore, D. (2021). The Essentials of Financial Literacy. Wiley.