View Share V Format Arrange Numbers File Insert Table Organize 3 Edit V=V x (1+ 93% Insert Add Category Table View Zoom + Section 1 Review Examples Section 2 Problems B D E F H EX. S. 97 You had a profitable year of farming and want to set aside some of the profits for construction of a building you will need in 4 98 years. The building will cost $100,000. You have access to an lovestment that will return an annual nominal rate of 3% 99 Interest is compounded monthly 100 101 How much do you need to save today to have $100,000 in 4 years? REX 102 103 The formula that takes into account the compounding (as seen in the slides is): 104 105 Where number of compounding periods per year; N = number of years 106 The trick here is to use an "updated" interest rate per period, and total amount of periods. 107 In this case, the compounding period is monthly, thus m=12. Then 108 109 The question is asking for a present value, so you would solve for Vo: VN 110 V= MEX 111 112 113 Answer 114 115 116 FV (V.) $100,000.00 117 N 118 Compounding periods (m) 119 3% annual 120 PV (Vo) Use the formula here 121 122 123 Alternative using the PV or FV functions in Excel: 4 years 124 VN N Compounding periods (m) 1 $100,000.00 4 years 12 3% annual 125 126 127 128 129 130 131 132 133 134 135 136 To use FV or PV in Excel you would need to convert the interest rates and the N to reflect the compounding periods n = 4 12 48 per period - 3%/12 0.25% Then use present value