10
Aug
Author: Maestro // Category:
General
The investment situation in the previous section assumed that a single amount was received at the end of an investment period. It is common for investments to pay an equal amount each period over an investment period. For example, assume that you could purchase an investment that would pay $1,000 at the end of each year for three years, and that you expect to earn a return of 8%. How much would you be willing to pay for the investment?
Calculate the present value of this annuity by calculating the present value of each payment and adding them together. Read more…
07
Aug
Author: Maestro // Category:
General
The present value of an investment that pays $3,000 at the end of three years at 8%, then, is as follows: $2,381.49 $3,000 0.79383 This is the same amount computed above, except for the effect of a rounding error. The interest factor for computing the present value of an investment is 1 divided by the interest factor for computing the future value of the same investment (same period and interest rate). Thus, 0.79383 in Table 3 for three periods at 8% equals 1 1.25971 from Table 1 for three periods at 8%. Read more…
04
Aug
Author: Maestro // Category:
General
Harry Morgan recently graduated from college and started his first full-time job. He wants to accumulate enough money in the next five years to make a down payment on a house. He has $3,000 that he can invest at the beginning of the five-year period. His investment will earn 8% interest. Read more…
01
Aug
Author: Maestro // Category:
General
Column B shows the amount the investment is worth at the beginning of each year before the contribution is made for that year. Column C contains the amount of interest earned for the year, and column D contains the amount invested at the end of each year. Column E reports the amount the investment is worth at the end of each year. The total in column C is the total interest earned for three years. Interest earned on the annuity is greater than that earned on a single investment of the same amount because the investment is growing each period by the additional amount invested as
well as by the amount of interest earned. Read more…