1 Normal Title No Spacing Heading 1 Font Time Value of Money

1 Normal Title No Spacing Heading 1 Font Time Value of Money, Opportunity Cost and Income Taxes Worksheet Scenario 1:Time Value of Money/Cash Management Products 1. Use this Bankrate\'s Simple Savings calculator to complete Scenario 1 ttp://www.bankrate con/calculators/savings/simple-savings calculator aspx, You will enter the Initial Amount of Savings (Present Value), Annual Interest Rate (Rate of Return), and Number of Periods/Yearsinto the calculator. The calculator will compute the Future Values. In this scenario you will look at the impact of interest rates on your savings. Suppose that you have $2,000 of savings. You don\'t anticipate needing to dip into these funds in the next five years. Based on the information provided in the table, calculate the future value (FV) of $2,000 at the end of years 1 and 5 if it were to be completely investedin each of the different cash management products Enter your answers in the indicated cellsof the table below. T column relates to question 2 of Scenario 1 FV at end of Year 5 ProductAnual Restrictions/Fees on FV at end of Year 1 Interest Product Usage Rate |Answer Answer Checking +000% -No minimum Account .No limit on Calculator Inputs Initial Amount Calculator Inputs Initial Amount Annual Interest Rate (compounded quarterly) (compounded quarterly) withdrawals Annual Interest Rate ch 6 7

Solution

In this question, interest rate in not given. So i have assumed it to be 10% compounded annually. You can just change the value in the formula provided and get the required ans.

Present Value = 2000

Rate (r) = 10%

Future value at the end of 1 year = Present Value * (1+r/4)^4

we have divided r by 4 because it is getting compounded quarterly.

Future value at the end of 1 year = 2000 * (1.025)^4 = 2207.6

Similarly, Future value at the end of 5 year = Present Value * (1+r/4)^(5*4)

Future value at the end of 5 year = 2000 * (1.025)^20 = 3277.23