Time Value of Money Project for Financial Management

Time Value of Money Project

1) While vacationing, Harry Rogers saw the vacation home of his dreams. It was listed with a sale price of $200,000. The only catch is that Harry is 40 years old and plans to continue working until he is 65. Still, he believes that prices generally increase at the overall rate of inflation. Harry believes that he can earn 9% annually after taxes on his investments. He is willing to invest a fixed amount at the end of each of the next 25 years to fund the cash purchase of such a house (one that can be purchased today for $200,000)

a) Inflation is expected to average 5% per year for the next 25 years. What will Harry’s dream house cost when he retires?

F = P (1 + i)n

Future value of the cost=200000*(1+0.05)^25

=677270.9882

=$677,271

b) How much must Harry invest at the end of each of the next 25 years to have the cash purchase price when he retires?

I=9%, N=25, PV=0, FV=$677,271

PMT= $7,996

2) You are about to buy your first home. You will take out a $300,000 mortgage for 30 years, monthly payments, with a fixed rate of 6%

solution: as the amortization schedule created in excel:

a) What is your monthly payment?

1) How much of that payment will be applied to interest?

2) How much will be applied to the principle?

monthly payment: $1,798.65

payment will be applied to interest: $347,515

payment will be applied to the principle: $300,000

b) What will your total payments be over the entire 30 year period?

1) How much of that total will be interest?

2) How much will be principle?

total payment: $647,514.57

total interest: $347,515

principle repaid: $300,000

c) What will be the outstanding loan balance after 10 years?

loan balance: ending balance: $251,057.17/ beginning balance: $257,370.50

d) During that 10 year period, what were your total