Will you please help me respond to my classmates with this and I will present one at a time with what I need to respond and what they have said.
Guided Response: Review several of your classmates' postings. Examine calculations and reply to at least two of your classmates' posts by adding recommendations to extend their thinking or posing questions to help them consider components they may have missed.
here is the first classmate
Part 1: Think of something you want or need for which you currently do not have the funds... How much do you need to invest today to reach that desired amount 12 years from now?
Currently I could use a vacation! This is also reality, Next year not only will I be graduated with my MBA (from Ashford) it will also be my 10th wedding anniversary. For this special event I would love to go on a cruise with my husband through the Panama Canal no matter if next year or in 12 years (celebrating 22 years).
Small Anniversary Trip: Total Approximate Cost $8,000 (for a balcony).
Present Value (PV) is a formula used in Finance that calculates the present day value of an amount that is received at a future date. The premise of the equation is that there is "time value of money". Time value of money is the concept that receiving something today is worth more than receiving the same item at a future date with the given rate of return or interest on the investment.
The formula is PV= C1/(1+r)n (Where C1= Cash flow at year 1, r= rate of return, n= number of periods)
Next year @ 5%: PV= 8,000/1.05= $7,619.04
Obviously, this type of investment over a year period at 5% is a difference of $380.96 and depending on the actual amount of return may be a good idea or not worth it.
In 12 Years @ 5%: PV=8,000/12.6= $634.92
In this scenario it is a bit tougher and although at the same conservative amount of return at 5% the 12 year time frame is harder to gauge what the actual price of the same vacation a year from now will cost with the inflation being included over this timeframe.
Part 2: You wish to leave an endowment for your heir that goes into effect 50 years from today... What amount would you like spent yearly to fund this grand party? How much money do you have to leave to your heirs 50 years from now assuming that will compound at 6% interest? Assuming that you have not invested anything today, how much would you have to invest yearly to fully fund the annuity in 50 years, again assuming a 6% monthly compounding rate?
The concept of compound interest is that interest is added back to the principal sum so that interest is earned on that added interest during the next compounding period.
The formula for the future value of a single cash flow using compound interest is FVn=PV0(1+r)n (Where FVn= the Future value at the end of n time periods, PV0= the present value of the cash flow, r= periodic interest rate.
In this case I would like to leave my beneficiaries at least $20,000.
20,000(1+0.06/12)12(50)= $398,719.11
Using the above interest rate of 6% and compounding over 50 years, without compound interest, I would earn $80,000.00. This means that thanks to the power of compound interest I will earn an additional $318,719.11 in interest at the end of the 50 year term.