Time Value of Money Assignment In Strategic Finance

Problem 2-5
Time to reach a financial goal You have $42,180.53 in a brokerage account, and you plan to
deposit an additional $5,000 at the end of every future year until your account totals $250,000.
You expect to earn 12 per cent annually on the account. How many years will it take to reach
your goal?

Solutions
Answer (Excel calculation)

Step 1
We will make use of the excel function NPER to get this answer. This function returns the
number of periods required for a series of cash flow to grow into a target value at fixed interest
rate. The inputs are:

 Rate,
 PMT
 PV
 FV
 Type

Step 2
Please see the snapshot from the excel model. The last row highlighted in yellow is your answer.
Figures in parenthesis, if any, mean ne...

Another Solution (Formula calculation)

The $5,000 is considered an annuity for which we want to find the FV; while the $42,180.53 is a
lump sum for which we also want to find the future value after n number of years.
Therefore, the sum of the FV of the annuity & the future value of the lump sum should be
$250,000 after n number of years.
To find the FV of an annuity:

FV= c*((1+r)^n-1)/r
= 5000*(1.12^n-1)/0.12
To find the FV of a lump sum:
FV= c*(1+r)^n
= 42180.53*(1.12)^n
Now:
$250,000 = 5000*(1.12^n-1)/0.12 + 42180.53*(1.12)^n
Since calculations are complicated, I have used excel to answer the problem, but you can use a
financial calculator as follows:
Using your financial calculator, enter the following data: I = 12;
PV = -42180.53; PMT = -5000; FV = 250000; N =? Solve for N = 11. It will take
11 years for John to accumulate $250,000

Problem 2-34

Amortization schedule

1. Set up an amortization schedule for a $25,000 loan to be repaid in equal instalments at

the end of each of the next 3 years. The interest rate is 10 percent, compounded
annually.?
 2. What percentage of the payment represents the interest and what percentage represents
principal for each of the 3 years? Why do these percentages change over time?

Answer

Step 1
The table that shows the complete payments until the loan amount is totally paid off is known as
amortization schedule.
Step 2
Given:

Equal installments= $25,000

Interest rate= 10%

Number of years= 3 years

Step 3
Annual payments can be calculated as:

Step 4
Amortization schedule:
Part b

Step 5
Percentage of principal and interest is shown below:

Step 6
Calculations:

First year:
Step 7
Second year:

Step 8
Third year:
Step 9
Answer: These percentage will change because the amount of loan is repaid and the balance
payment is reduced. Hence, the amount of interest reduces every year.