MTH 1120 Week 6 Assignment |  Assignment Help | Baker College

Finance Application Activity

Instructions: Show all work for each section. Any paragraphs should be typed and written in complete sentences.  Use Times New Roman, 12-point font and double space.  Cite any resource that you use.Attach any additional paperwork to the back of your project.

Part 1:  Planning Ahead with Compound Interest

Scenario:  Suppose you have a new baby.  You estimate that you need $ 100,000 for their college education when they are ready to go to college in 18 years. 

1.  Assume you invest $10,000 in a mutual fund (e.g. money market fund) atan APR of 7% compounded quarterly.  How long, to the nearest tenth of a year, will it take the $10,000 to grow to $100,000?[Solve using both methods below.]

2.  At the end of 18 years, will your investment have grown to the $100,000 needed for your child’s college fund?  Explain you’re your answer means, in terms of the stated goal, using the answer in #1 above.

3.  Explain (show your work), how you might use one of the two methods above, to determine exactly how much money needs to be invested at 7%, compounded monthly, so your child has a college fund of $125,000 in 18 years.

Part 2: Career & Investments

Go to the Salary Expert websitefor career information.

·        Under Salary Info you will see: List of Average Job Salaries & Salary Comparisons by selected Careers; OR

·        Type in the Search bar to locate a career choice you are interested in, using the program of study you are pursuing

·        (PRINT the screen (or use the “snipping tool”) of the Career Choice you have chosen& attach it to your project.)

1.      Find the annual median salary from the website.

·     Median annual salary:  _________________________

2.In a one-pagetyped summary include the follow: (attach the summary to the back of your project)

·     Is the amount of money needed, calculated in #3, something your future position can support, based on your expected median salary in your future position? Explain.

·     Identify other factors and explain how they may prevent you from investing, the money you would like to be able to invest, in your child’s college fund.

·     If you cannot accumulate the $100,000 you have estimated that will be needed to fund their education, what alternative strategy/plan is there to make up the shortfall of funds?

TI-83/84 Plus Calculator

MTH 108

Financial Calculator Sequences for Chapter 4

Compound Interest (section 4B)

To calculate compound interest on an investment/loan, use the following calculator sequence:

APPS  

1:Finance      ENTER

1:TVM Solver          ENTER

fill in screen using arrow buttons

N =                  Number of pay periods (years x payments each year)

I% =               Interest rate in percent form

PV =               Present value (principal amount invested today)

PMT =           Set to 0 for investments that are not annuities

FV =               Future value

P/Y = Number of times interest is compounded (or the # of

times you are paid interest/year)

C/Y =             Number of times interest is compounded/year

PMT:             should be set to END

Fill in the information given.  Arrow up to the missing variable and press ALPHA ENTER (notice the word SOLVE written above the Enter button in green). Most likely you are looking for present value or future value when solving compound interest problems.

Note:  A value must be put in for each variable.  You cannot leave a variable blank.  If you do not know the value put a 0 then solve for the value later. 

Note:  One the following PV, PMT or FV will be a negative number.  Positive and negative numbers just represent cash in-flow and cash out-flow.  Do not be concerned with the sign of the number.

Example:  Carol invests $12,000 today.  How much will Carol have at the end of seven years with 6% interest, compounded quarterly? 

We are looking for future value for this example.  Fill in the screen then solve for FV.

APPS   

1:Finance      ENTER

1:TVM Solver          ENTER

N=28                                      7 years compounded 4 times/year

I%=6                                     6% interest rate       

PV=12000                             Amount of loan

PMT=0                                  She is not making any monthly payments

FV=Alpha ENTER               This is the unknown (should get -18206.66..)

P/Y=4                                     Since this is quarterly

C/Y=4                                    Since this is quarterly

PMT:END

Example:  Abby wants to attend college.  She estimates she will need $35,000 six years from today.  Assume Abby’s bank pays 4% interest compounded semiannually.  What must Abby deposit today to have $35,000 in six years?

We are looking for present value for this example.  Fill in the screen then solve for PV.

APPS  

1:Finance      ENTER

1:TVM Solver          ENTER

N=12                                      6 years, compounded semiannually (2)/year

I%=4                                     4% interest rate       

PV= Alpha ENTER              This is what we are solving for

PMT=0                                  She is not making any monthly payments

FV=35000                             Amount she estimated for the future

P/Y=2                                     Since this is semiannually

C/Y=2                                    Since this is semiannually

PMT:END                            

Arrow back up to PV and hit ALPHA Enter   (should get -27597.26115…).  So she needs $27,597.26 today to have $35,000 in the future.  

Annuities (section 4C)

To calculate ordinary annuities use the following calculator sequence:

Example:  Jack wants to invest $1500 semiannually for 5 years.  The interest rate is 4.75% compounded semiannually.  Find the value of the annuity at the end of 5 years. 

We are looking for future value in this annuity example.  Follow the calculator sequence for annuities and solve for FV.

APPS  

1:Finance      ENTER

1:TVM Solver          ENTER

N = 10                                    5 years, semiannually (5x2=10)

I% = 4.75                              interest

PV = 0                                    The account is worth nothing to start with

PMT = 1500                         The amount deposited in account semiannually

FV = Alpha ENTER             This is what the annuity will be worth

P/Y = 2                                   Two payments each year

C/Y = 2                                  Compounded twice each year

PMT: END                           

You should get FV= - 16708.99882…  So in five years Jack will have $16,709 with this annuity.  Jack invested a total of 1500 x 10 = $15,000 in this account.

Example:  At age 30 you start saving for retirement.  If your investment plan pays an APR of 6% and you want to have $2 million when you retire in 35 years, how much should you deposit monthly?

We are looking for the PMT in this example.  We have the desired future value of $2 million.

APPS  

1:Finance      ENTER

1:TVM Solver          ENTER

N = 420                                              35 years, monthly (35x12=420)

I% = 6                                               APR

PV = 0                                                The account is worth nothing to start with

PMT = Alpha ENTER                     You need to know the amount deposited in account monthly

FV =   2000000                                This is the desired amount in the account

P/Y = 12                                            12 payments each year

C/Y = 12                                            Interest calculated monthly

PMT: END                                       

You should get PMT= -1403.7941…  So in 35 years you will have $2 million with this annuity.  You will have invested a total of $1403.79 x 420 = $589,591.80 to have $2 million in the future.

Consumer Loans (section 4D)

You can use the Finance feature on your calculator to figure out payments for a house, car, or any loan.  Most likely you are solving for PMT in examples using financing.

Example:  Suppose you want to purchase a $25,000 car.  You have $2,000 to put down on the car.  Interest rates for a new car loan are 5.25% for 4 years.  What are your monthly payments?

APPS  

1:Finance      ENTER

1:TVM Solver          ENTER

N = 48                                   4 years, 12 payments per year (48)

I% = 5.25                              5.25% interest

PV = 23000                          The amount owed is 23000

PMT = Alpha ENTER         This is what we are solving for

FV = 0                                   Future value of the loan should be 0

P/Y = 12                               12 payment per year

C/Y = 12                                Interest calculated monthly

PMT = END            

You should get -532.28239…  So the monthly payment is $532.28.

The total amount paid for the loan is $523.28 x 48 = $25,177.44 so since you put $2,000 down, you paid $27,177.44 for the car.

You paid $25,177.44 - $23,000 = $2177.44 in interest for borrowing the money.

Example:  Suppose you know that you can only afford a $325 per month payment and you want to pay the car off in 4 years.  How much should you finance at 5.25%?

APPS  

1:Finance      ENTER

1:TVM Solver          ENTER

N = 48                                   4 years, 12 payments per year (48)

I% = 5.25                              5.25% interest

PV = Alpha ENTER             This is what we are solving for

PMT = 325                            Monthly payment    

FV = 0                                   Future value of the loan should be 0

P/Y = 12                               12 payment per year

C/Y = 12                                Interest calculated monthly

PMT = END            

You should get PV= -14043.29749… So find a car that is $14,043.30 or less.