Abstract
The first steps toward understanding the relationship between the value of dollars today and that of dollars in the future is by looking at how funds invested will grow over time. This understanding will allow one to answer such questions as; how much should be invested today to produce a specified future sum of money?
Time Value of Money
In most cases, borrowing money is not free, unless it is a fiver for lunch from a friend. Interest is the cost of borrowing money. An interest rate is the cost stated as a percent of the amount borrowed per a period of time, usually one year. The current market rates are composed of three items. The Real Rate of Interest is what compensates lenders for postponing their own spending
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Opportunity cost is a basic term from the disciplines of economics and accounting. The acceptable definition of the term is, "The advantage forgone as the result of the acceptance of an alternative."
For example, the opportunity cost of a single glass of beer is about $7.00. The generally accepted Opportunity Cost factor, including inflation, is 6.7. Therefore, that $1.00 glass of beer cost the buyer about $7.00 in future earnings.
Opportunity cost is an important concept in financial decision-making. There is a useful rule of thumb for incorporating opportunity cost into financial decision-making. If faced with a spend-or-invest trade-off and deciding to pay off debt, subtract the projected income earned on the investment to calculate a net savings. If deciding to invest, subtract the projected interest paid off on the debt to calculate net savings.
The Rule of 72 is a simple financial rule that simply states that investments will double its initial amount every 72 periods that it is compounded. The formula is written like this:
72/r
where: r = the rate of return per period.
In other words, an initial amount such as $1000 which has a fixed rate of return of 20% will double itself in just over three and a half years, 72/20 = 3.6.
This kind of financial equation is very handy to use when you need to compare investment opportunities or loans such as home loans. The Rule of 72 is commonly used in all areas of personal finance and financial planning,
You believe you will need to have saved $520,000 by the time you retire in 40 years in order to live comfortably. If the interest rate is 5% per year, how much must you save each year to meet your retirement goal? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Opportunity cost as defined by Merriam-Webster.com retrieved March 23, 2016, from http://www.Merriam-Webster.com/dictonary/opportunity cost is “the added cost of using resources (as for production or speculative investment) that is the difference between the actual value resulting from such use and that of an alternative (as another use of the same resources or an investment of equal risk but greater return).” Opportunity cost can be defined as what you give up in order to do something, a choice between two things. Opportunity cost may be expressed in terms of anything which is of value to a person. Waggoner (2016), says that people have opportunity cost with every decision they make. An example is the time chosen to write this paper I gave up the time I
Opportunity cost means giving up something of value or importance to you to achieve a particular goal or outcome. It is a chance that causes you to miss out on something you want, but an individual can benefit by gaining something for the opportunity they accepted.
The Damon Investment Company manages a mutual fund composed mostly of speculative stocks. You recently saw an ad claiming that investments in the funds have been earning a rate of return of 21%. This rate seemed quite high so you called a friend who works for one of Damon’s competitors. The friend told you that the 21% return figure was determined by dividing the two-year appreciation on investments in the fund by the average investment. In other words, $100 invested in the fund two years ago would have grown to $121 ($21 ÷ $100 = 21%).
AND AMORTIZATION 100% 16 CALCULATING INTEREST
Billy would still deposit $6 a week and about $24 a month. With the interest included, Billy would’ve saved about $2,020.49 in seven years, however this is risky because he could possibly lose a lot of money while investing in stocks.
The amount of money that I had spent over one week ended up totaling $100.77. To come up with the amount of money that would be spent in a year if I spent $100.77 for 52 weeks, the total would be $5,240.04. Then to determine the amount of money that would be spent over 25 years, it would be $5,240.04 multiplied by 25 years, and that would be $131,001. That is $131,001 that I spent on completely unnecessary expenses. To determine what $131,001 would equal in todays money it requires to be plugged into an equation, PV=FV/(1+i)^n . “FV” stands for the future value, that is the value that we calculated by multiplying by 25 years, $131,001. The “i” stands for the interest
What annual interest rate is needed to produce $200,000 after five years if only $100,000 is invested?
9. What is the present value of an 8-year annuity that makes quarterly payments of $73 if
Week 8 DQ 4Is the compound interest formula—such as would be used to calculate a car loan—an
Every day of our lives, we make choices. Some of these choices are very difficult, while others might be so easy that they are subconscious. Each decision we make comes with a downfall. That is the next best option we could have chosen or what we call the opportunity cost of making the decision that we did!
Team C disclosed to ABC Company that if they invested their entire profit of $150,000 and wanted to double it, they would need to use the Rule of 72 to decide what interest rate is going to work for them. If the 4% interest rate is going to be used, it will take a total of 18 years to double their profit. To find this out they will need to divide 4 from 72 and the result will be 18. If the 7% interest rate is going to be used, it will take a total of 10.3 years to double the profit. To find this you will need to divide 7 from 72 and the result will be 10.3. We do realize that most companies cannot take 100% of their profits and invest them, so we decided to also review a $25,000 investment.
First we need to get the present value of the annuity for the 1,500 semiannual PMTs at year 14
Interest is the fee paid for borrowing money. Most individuals or business owners pay simple interest on a short-term loan, which is usually a loan of up to 1 year. The amount of interest charged by a bank depends on three factors: