Week 2 Initial Investment: Think Of Something You Want Or Ne

Week 2initial Investmenta Think Of Something You Want Or Need For Wh

Initial Investment Decision: Calculate the present value of a desired purchase costing between $2,000 and $50,000, using the present value formula, with an assumed interest rate between 5% and 10%, to be achieved in 12 years. Determine how much money is needed today to reach this goal. Endowment Planning: Calculate the future value of an endowment intended to fund a yearly grand soirée forever, assuming the endowment begins in 50 years and compounds at 6%. Also, find the annual investment amount required over the next 50 years to fully fund this perpetual annuity, assuming a 6% monthly compounding rate.

Paper For Above instruction

Financial planning involves determining the necessary capital investments to meet specific future financial goals, whether for purchasing a desired asset or establishing a perpetual endowment. The present value (PV) formula is a fundamental tool for calculating how much a person must invest today to realize a future monetary goal. This formula takes into account the future value (FV), the discount rate (interest rate), and the time horizon. For instance, if someone desires to purchase an item costing $20,000 in 12 years and expects an investment return of 7%, the present value can be computed as PV = FV / (1 + r)^n. This calculation informs how much to invest now to meet the target, factoring in assumed risk and interest rate. Selecting an interest rate within the 5% to 10% range reflects different risk appetites, with higher rates indicating riskier investments but potentially higher returns.

For establishing a perpetual endowment, forecasting the amount needed to fund an annual event indefinitely requires understanding the perpetuity formula. The amount to be set aside today to fund the endowment in 50 years can be calculated by understanding the future value of the endowment, which grows at a compounded rate of 6%. The annual payout during the life of the endowment would be based on the present value of a perpetuity, discounted back to the future date. To determine how much must be invested annually to fund this endowment starting today, the future value of an ordinary annuity formula applies, considering monthly compounding at 6%. This approach helps in planning systematic investments over the next five decades to ensure the intended perpetual funding is feasible.

These calculations exemplify fundamental financial concepts and highlight the importance of timing, interest rates, and compounding frequencies in long-term financial planning. Whether preparing for substantial purchases or establishing lasting legacies, understanding these principles enables individuals to formulate realistic strategies aligned with their financial goals.

References

  • Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice (15th ed.). Cengage Learning.
  • Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset (3rd ed.). Wiley.
  • Investopedia. (2023). Present Value (PV). https://www.investopedia.com/terms/p/presentvalue.asp
  • Moneychimp. (n.d.). Present Value and Future Value Calculations. https://www.moneychimp.com/articles/va/calculating_present_value.htm
  • Ross, S. A., Westerfield, R. W., Jaffe, J., & Jordan, B. D. (2019). Corporate Finance (12th ed.). McGraw-Hill Education.
  • Siegel, J. J. (2015). Stocks for the Long Run. McGraw-Hill Education.
  • SmartAsset. (2022). How to Calculate Present Value. https://smartasset.com/investing/how-to-calculate-present-value
  • Stolowy, H., & Levratto, N. (2013). Financial Accounting and Reporting: A Guide for Public Sector Organizations. Routledge.
  • The Wall Street Journal. (2023). Investment and Capital Planning Articles. https://www.wsj.com
  • Yunus, M., Tetteh, P., & Carney, K. (2018). Financial Management Principles and Applications. Routledge.

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