Discuss Time Value of Money.
You are currently a financial analyst within Blue Butterfly Company, a small family owned corporation that manufactures magnetic bookmarks. Blue Butterfly management would like to provide a contributory pension plan for five current members of the management team. Management believes they can afford to invest $10,000 per month for the next 10 years. They anticipate the rate of return will be 8%. At the end of the 10 years, they expect retiring employees to start withdrawing from this pension plan. The anticipated longevity after retirement is expected to be 20 years, and management believes the rate of return on the investment to continue through the 20 years of retirement payout. Management has requested your assistance in determining relevant values so they can finalize the components of the pension plan.
“Using Excel, Develop A Spreadsheet Presentation” that covers the following:
Explain the concept of the time value of money, including the present and future value of $1, and present and future value of an annuity. Explain the difference between the annuity payment at the beginning and the end of the period.
Demonstrating the future value of the monthly cash investments for the next 10 years given the investment earns the projected 8% annual return.
In Excel, calculate the total monthly payment that can be withdrawn from the investment over 20 years given the anticipated 8% annual rate of return continues to be met through the 20 years of retirement. Provide management the monthly payment amount that will be available to payout in monthly pension amounts.
Assuming all five members of management will receive the same monthly annuity payment, provide management the proposed monthly retirement payment that can be offered to these five members of management.
Use the built-in cash flow functions in Excel to perform all calculations, explaining in the adjacent cells the values you entered the function.
The concept of TVM is important in finance and investment because it allows investors to make informed decisions about how to allocate their money over time. By understanding the time value of money, investors can calculate the present and future value of investments, compare the returns on different
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There are several important variables in the calculation of TVM, including the present value (PV), future value (FV), interest rate (i), and the number of periods (n). The PV is the current value of money, while the FV is the value of money at some point in the future. The interest rate represents the cost of borrowing money or the return on investment, while the number of periods is the length of time over which the investment is made.
The basic formula for calculating TVM is:
FV = PV x (1 + i)^n
This formula can be used to determine the future value of an investment, given the present value, interest rate, and number of periods. Alternatively, the formula can be rearranged to solve for the present value, given the future value, interest rate, and number of periods.
There are also more complex TVM calculations that take into account compounding interest, annuities, and other factors. These calculations can be used to determine the value of different investment options, including stocks, bonds, real estate, and other financial assets.
Overall, understanding the time value of money is essential for making informed financial decisions and maximizing the return on investment over time. By considering the TVM in their investment decisions, investors can better manage risk, avoid costly mistakes, and achieve their financial goals.