Answer I-IV

Sample Problem \#1: Sarah wants to have $100,000 in her savings account after six years. How much must she put in the account now, if the account pays a fixed interest rate of 8%, to ensure that she has $100,000 six years from now? Solution: (i) Develop the timeline: (ii) Identify the time value of money variable that needs to be solved/calculated: Present Value (PV) The question is how much she should put in now; this unknown value is as of today (now) and therefore represented by the present value. (iii) Values of the remaining variables: FV=100,000N=6I/YR=8PMT=0 She wants $100,000 after six years (this amount is expected to occur in the future) and therefore is represented by the future value (FV). The investment duration is six years and therefore represents the number of periods (N). She expects to earn 8% and represents the interest rate (I/YR). There is no annuity amount for this problem and therefore payment (PMT) is zero. (iv) Calculation: Calculate PV =63,016.96 Using the inputs in Step (iii) and solving for the present value you arrive at the amount she should invest in the account today: $63,016.96