Report

FIN 200: Personal Finance Topic 7-Project and Annuities Lawrence Schrenk, Instructor 1 (of 31) Project Guidelines 2 (of 31) Downloading and Opening the Project Spreadsheet Login to Blackboard ‘Course Documents” Right click on project link, and “Save target as...” Close Blackboard Double-click on project to open Excel Do you have Excel installed? Use only this version of the project. 3 (of 31) Blackboard 4 (of 31) Opening the Project “Disable Macros?”–Yes What are ‘macros’? 5 (of 31) Inside the Project Click on the ‘index’ tab. 6 (of 31) Project Index Page 7 (of 31) Project Worksheets Excel ‘Lingo’ and Basic Procedures Worksheets (or ‘Sheet’) Cells References, “G20” Protected versus Unprotected Cells Click on Cell, Type, Hit Return Two Worksheet ‘Inputs’ Text Numbers 8 (of 31) Text Inputs 9 (of 31) Numbers Inputs–Auto-Functions Dollar Values Percentage Input 12% as ’12’ like Calculator Calculations 2000 to $2,000–No commas in numerical inputs. Calculations are Programmed and Automatic No text in numbers cells! #VALUE! 10 (of 31) Numbers Inputs–Auto-Functions 11 (of 31) Project Guidelines Instructions on Individual Worksheet See Project Web Page Perspective: 2-3 Years after Final Year of Education Realistic Data Web Research Common Sites Unique Sites Ask for Help 12 (of 31) Progress One or Multiple Worksheets per Topic Periodic Review Worksheets Organized by Topic, not Chapter. Weekly Progress Expectations Blackboard–’Project 1 Review’, etc. Not Graded Final Submission Don’t put anything in the ‘Digital Drop Box’. 13 (of 31) CAUTION Do not give out private information to web sites. Best Case–Insurance agents will call you for years. Worst Case–Identity Theft. Project web page has suggestions for individual worksheets. I can always help. 14 (of 31) Uploading the Project I 15 (of 31) Uploading the Project II 16 (of 31) Requirements I Own a car (financed with a car loan), Own a house (financed with a mortgage), Have a credit card on which you have some (non-trivial) balance. Have the following insurance policies: Medical Life Auto, and House. 17 (of 31) Requirements II Save for retirement. Plan to leave a bequest (i.e., money in you will) to someone or an organization, e.g., a charity. If you want to alter these, let me know, but you need to do something in each category. Complete all worksheets. 18 (of 31) Annuities: Present and Future Value 19 (of 31) Annuities An annuity is NOTES: A series of constant payments That occur at regular intervals and Do not continue forever. The first payment occurs next period (not now). Payments are annual. We will do non-annual later. If the payments go on forever, it is called a ‘perpetuity’ (but we don’t need to study them). 20 (of 31) Annuity Example You want to buy a car by saving $2,000 per year, rather than depositing the entire amount (present value) now. This is the more common way to save for a large purchase or for retirement. Not many of have the present value of our retirement needs right now! To have $1,000,000 at your retirement in 50 years (at 3% interest), deposit $228,107.08 today. ▪ Why the low interest rate? ▪ 21 (of 31) Annuity Time Line The constant cash flows of a 3 year annuity of $100.00 per year at 10%: I/Y 0 I/Y 1 2 3 PMT PMT PMT 10% 0 I/Y 10% 1 $100.00 10% 2 $100.00 3 Payments begin next period. $100.00 ▪ 22 (of 31) Uses of the Annuity Calculation Our Key Calculation Present Value of an Annuity ‘Borrowing’ Problems (Loans) How much can I borrow (PV)? How much are my payments (PMT)? What interest rate am I getting (I/Y)? How long will it take (N)? ▪ Future Value of an Annuity ‘Savings’ Problems (Retirement Fund) How much will I have (FV)? Ditto ▪ 23 (of 31) Present and Future Value of an Annuity We can either find the present value or the future value of an annuity I/Y I/Y 0 1 2 3 PV PMT PMT PMT I/Y 0 I/Y I/Y 1 PMT I/Y 2 PMT Note the asymmetry! ▪ 3 PMT FV ▪ 24 (of 31) The Annuity Calculation For an annuity we have five possible inputs: But we will often only use four of them at a time: PV, FV, I/Y, N, PMT PV, I/Y, N, PMT FV, I/Y, N, PMT As before, you input three variable and your financial calculator will give the fourth as a result. Make sure the unused input, PV or FV, is zero. 25 (of 31) Future Value with a Calculator How much do we have after 3 years if we save $200 per year beginning next year and the interest rate is 12%? 1. 2. 3. 4. Input 3, Press N Input 12, Press I/Y Input 200, press +/-, press PMT (you get -200) Press CPT, FV to get 674.88, i.e., $674.88 NOTE: As before one (and only one) of the dollar value inputs must be negative. 26 (of 31) Future Value with a Calculator 12% 0 1 $200.00 12% 12% 2 $200.00 3 $200.00 $674.88 3 12 --------- -200 674.88 Remember to press CPT, before FV (if necessary). 27 (of 31) Future Value of an Annuity Practice Problems How much will you have if you save $100.00 per year for 25 years at 8%? How much will you have if you save $1000.00 per year for 5 years at 7%? $7,310.59 $5,750.74 How much will you have if you save $1.00 per year for 50 years at 10%? ▪ $1,163.91 ▪ 28 (of 31) Present Value with a Calculator What is the present value of $200 per year for 3 years beginning next year, if the interest rate is 12%? 1. 2. 3. 4. Input 3, Press N Input 12, Press I/Y Input 200, press +/-, press PMT (you get -200) Press CPT, PV to get 480.37, i.e., $ 480.37 NOTE: As before one (and only one) of the dollar value inputs must be negative. 29 (of 31) Present Value with a Calculator 0 $480.37 3 12% 12% 1 $200.00 12 480.37 2 $200.00 -200 12% 3 $200.00 --------- Remember to press CPT, before FV (if necessary). 30 (of 31) Present Value of an Annuity Practice Problems What is the present value of $100.00 per year for 25 years at 8%? What is the present value of $1000.00 per year for 5 years at 7%? $1,067.48 $4,100.20 What is the present value of $1.00 per year for 50 years at 10%? ▪ $9.91 ▪ 31 (of 31) Using PV and FV Keys There are situations in which you need all five buttons, i.e., both PV and FV. Savings Problems/Future Value Problems You have already accumulated some savings. You want to know how much you will have in the future (FV) taking into account you currently have some amount saved (PV). Your accumulated savings is PV. 32 (of 31) PV and FV Timeline How much do we have after 3 years if we save $200 per year beginning next year, the interest rate is 12%, and we already have $500? 12% 12% 0 1 $500.00 $200.00 12% 2 $200.00 3 $200.00 ??? 33 (of 31) PV and FV problems How much do we have after 3 years if we save $200 per year beginning next year, the interest rate is 12% and we have already saved $500? Input 3, Press N Input 12, Press I/Y Input 500, press +/-, Press PV (you get -500) Input 200, press +/-, press PMT (you get -200) Press CPT, FV to get 1377.34, i.e., $ 1377.34 NOTE: In this type of problem both dollar inputs must be negative. 34 (of 31) PV and FV with a Calculator 0 $200.00 12% 1 12% $200.00 2 12% $200.00 3 $200.00 $ 1377.34 3 12 -500 -200 1377.34 Remember to press CPT, before FV (if necessary). 35 (of 31) PV and FV Practice Problems How much do we have after 3 years if we save $500 per year beginning next year, the interest rate is 12% and we have already saved $1,000? $3,092.13 How much do we have after 3 years if we save $200 per year beginning next year, the interest rate is 8% and we have already saved $500? ▪ $1,279.14 ▪ 36 (of 31)