Reference no: EM132904816
Question - Keep in mind that an annuity is a series of equal dollar amounts paid or received at evenly spaced time intervals such as your car payment or retirement payments if they are the same amount. If you have differing amounts you will need to calculate the future amount as presented by illustration E-7. Review table 2. Note that the number of payments coincides with the number of periods. So the interest compounds whenever the payment is paid or received. 1. If you invest at the end of each year beginning one year from today the amount of $10,000 for 10 years assuming an 8% rate, how much will it accumulate to?
Keep in mind that regular annuities are assumed to take place at the end of the period. So when you make a car or house payment, while you make the payment on the first day of the month you are actually paying the interest for the past month. It's also very important to understand that interest rates are quoted as an annual rate, but if any compounding takes place more than once each year you must adjust your interest to use the tables. So a 10% interest rate for payments that happen each 6 months or semi-annually would require that you use the 5% column. 1. If you invest $5,000 at the end of each 6 month period beginning in 6 months,for 5 years at 8% interest, how much will you have at the end of the 5 years. Don't forget to adjust your interest rate when you go to the table as well as your number of periods.
Present value calculations are the opposite of future value. Picture the future value as a blown up balloon. The air represents the interest. When we are calculating the present value of a future amount we are letting the air out of the balloon. The higher the discount rate (interest rate) the more air you let out each period and the more periods you have the more air you let out, thus you have a smaller present value. As your review table 3 on page E-8 note that all of the factors are less than one because the present value of 1 will always be less than the future amount.
1. What is the present value of $50,000 that you will receive in 10 years assuming a 7% discount rate?
2. What is the present value (also known as the discounted amount) of $50,000 that you will receive in 20 years assuming an 11% discount rate?