Primary Task Response: Within the Discussion Board area, write 400–600 words that respond to the following questions with your thoughts, ideas, and comments. This will be the foundation for future discussions by your classmates. Be substantive and clear, and use examples to reinforce your ideas.
The time value of money concept is one of the 3 major principles of the study and practice of financial management. It is used to evaluate potential investments, determine a rate of return on a project, calculate the required payments on a loan or annuity, and estimate a future value of funds currently invested and the present value of funds to be received at some future date. It is imperative that managers at all levels of business have a working knowledge of this topic. In your first task, you have been asked to engage your colleagues in a detailed and documented discussion about the time value of money concept: what it is, why it is important, how it is used, and generally, how the applications to single and periodic payments are computed using various calculation methods and formulas.
In your initial post, identify and recommend at least 1 credible Web site that an investor can visit to find the current market value of market indexes such as the Dow Industrial Averages, and address at least 3 of the following:
- What is the discounted cash flow concept, and why is it essential for financial managers to understand and employ this important concept?
- What are the methods associated with evaluating single or periodic payments, and what is at least 1 application of each?
- Discuss the different methods that can be used to calculate these amounts, and explain how at least 1 of these models can be used.
- How can the time value of money models or formulas be used to determine the rate of return for an investment or the time it will take for a current sum to grow to a desired future amount?
- Discuss the “Rule of 72″ and how it can be used to estimate how long it takes for money to double at various rates of return.
- Identify and recommend at least 1 credible Web site that an investor can visit to find the current market value of market indexes such as the Dow Industrial Averages.
Be sure to document your posts with in-text citations, credible sources, and properly listed references.
Part 2 Word document of 700–1,000 words with attached Exc
Your next assignment as a financial management intern is to apply the knowledge that you acquired while engaging in the time value of money discussion that you had with your colleagues. In this task, you will be building the foundation for a retirement plan using the concepts presented in this phase. This individual project deals with two timelines: years before retirement (pre-retirement stage), years during retirement (retirement stage).
Part 1
For the first part of this plan, we need to calculate the rate of return of our retirement savings will earn until we reach our retirement age (67 years old). To do this we are, you will need to estimate the 5-year average rate of return of the stock market (you should use the S&P 500 stock index, which can be researched at finance Web sites) using the table below:
| S&P 500 Index Value 5 yrs. ago
(PV) |
S&P 500 Index Value Now
(FV) |
Number of Periods
(NPER) |
5-Year Return on S&P 500 Index
(RATE) |
| 5 |
After calculating the 5-Year Return on the S&P 500 Index (RATE), determine how long it will take for an investment to double using the Rule of 72. Now that you have an understanding of the return in the market, you need to think about planning for future retirement.
Part 2
For the 2nd part of this plan, we need an understanding of how much money an individual would need in the future for retirement. For this step, assume an individual needed the following amounts to retire, how much would he or she have to invest today?
The future value of the accounts is given in the table below.
The rate of return we are assuming will be the 5-Year Return on Top 500 Stocks you calculated in the previous step.
For the years to retirement, assume retirement age is 67. Calculate the difference between retirement age and the current age of an individual (i.e. 30, 20, 30 years).
Now you are ready to calculate the present value of the following amounts (FV of Account).
- $1,000,000
- $2,000,000
- $4,000,000
| FV of Account (Given) | 5-Year Return on Top 500 Stocks (RATE) | Years to Retirement (NPER) | Find PV of Investment |
| $ 1,000,000 | |||
| $ 2,000,000 | |||
| $ 4,000,000 |
Part 3
For the 3rd part of this retirement plan, you will need to estimate the future cost of 3 lifestyles assuming an inflation rate of 3% and the number of years before you turn 67 years old. Below are three different lifestyles to consider:
- Basic: Current cost = $50,000
- Comfortable: Current cost = $100,000
- Luxury: Current cost = $150,000
You will use the same number of years to retirement (NPER) as you calculated in the previous step.
In the table below, calculate the future value of the current lifestyles.
| PV of Life Style
(Given) |
Average Rate of Inflation
(RATE) |
Years to Retirement
(NPER) |
Find FV of Life Style |
| $ 50,000 | 3.0 % | ||
| $ 100,000 | 3.0 % | ||
| $ 150,000 | 3.0 % |
Part 4
For the 4th part of this retirement plan, you will utilize the FV of the Life Styles you calculated in the previous step to understand how much money an individual will need to have saved to get through the retirement stage.
To do this, you will need to estimate the life expectancy of the retiree. Based on current averages, the life expectancy of an individual is 90 years of age. Now, you can subtract the life expectancy of the retiree from 67 (the retirement age) to determine the number of years in during the retirement stage (NPER, given 23 years).
The rate of return that will be used is adjusted for 3% inflation. (hint: the inflation adjusted amounts will be the payment as you will be calculating the present value of this annuity using a rate of return of 12%).
In the following table, calculate the total amount that will need to be saved to get through the retirement stage (Required Value at Retirement).
| FV of Life Style (PMT) | Given Expected Rate of Return (RATE) | Years in Retirement (NPER) | Required Value at Retirement
(Find PV of Annuity) |
| 12.0% | 23 |
Part 5
For the 5th part of this retirement plan, calculate the annual contribution that needs to be made to have each required amount at retirement. This is one of the most important parts of this plan, as this is the amount an individual needs to save each year before reaching the retirement stage.
To determine the annual contribution, in the table below, use the amount that you calculated in the previous step (Required Value at Retirement) the market rate of return you calculated in the 1st part of the plan, and the number of years to retirement in the 2nd part of the plan.
| Required Value at Retirement
(PV of Annuity) |
5-Year Return on S&P 500 Index
(Rate) |
Years to Retirement
(NPER) |
Annual Contribution Required to meet goal
(Find PMT) |
- After completing the required calculations, explain your results in a Word Document and attach the spreadsheet showing your work. Be sure to explain the following:
o The difference between present and future values
o How the present value and future value calculations are calculated and related
o The difference between compounding and discounting
Note: You can find information about the top 500 stocks at this Web site.
Reference
S&P 500 index chart. (2014). Retrieved from the Yahoo! Finance Web site:http://finance.yahoo.com/echarts?s=%5egspc+interactive#symbol=^gspc;range=1y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=;
Be sure to document your paper with in-text citations, credible sources, and list of references used in
