Reference no: EM133557712

Question: Calculate the future value of what your splurge is costing you over time. Base your calculation on the future value of an annuity for 20 years at a 7% interest rate. Future value tables can be found in the appendix of your textbook at the end of Chapter 1.

Examples of Future Value Problems... Your textbook contains tables on pages 45 through 46 that can be used to calculate the future values of either a lump sum (single payment) or an annuity (regular, equal payments). You will have several opportunities to calculate future values in this coming week's assignment so I thought I would provide some examples to assist you with the work. Hint 1 - If you are asked to calculate the future value of a lump sum or single payment you should use the tables located on page 45 of your textbook (Exhibit 1-A). Example: What is the future value of $500 at 11% for 15 years? Solution: Use the table located on page 40 of your textbook. Find the column for the interest rate that represents 11% (top table on page 40 far right column), then using the left hand column of the same table find the period that represents 15 years.... The factor in the table should be: 4.785 Thus, to calculate the future value of a lump sum ($500) at 11% for 15 years you would do the following: $500 x 4.785 = $2,392.50 - What this solutions means in plain English is if you were to put $500 into an account that is earning an 11% rate of return you would have $2,392.50 at the end of 15 years from your original investment of $500. Hint 2 - If you are asked to calculate the future value of a series of equal payments (like you are in this week's discussion posting), you would use the tables located on page 46 of your textbook (Exhibit 1-B). Example: How much would it cost you in total if you spent $1,300 per year eating out over a 10 year period using an interest rate of 5%? Solution: Use the table located on page 46 of your textbook. Find the column for the interest rate of 5% and then under the period column (left hand side of the same table), find the row for 10 years. You should come up with a factor of 12.578. Thus, to calculate the future value of an annuity ($1,300 per year for 10 years at 5%) you would do the following: $1,300 x 12.578 = $16,351.40 - This solutions means that if you were to put your $1,300 per year away in an account earning 5% interest that you would have $16,351.40 in your account at the end of 10 years. It also means that if you really do spend $1,300 per year ($25 per week) eating out that it is costing you $16,351.40 over 10 years using a rate of return of 5%.