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Time Value of Money Solution Grid

 Self-Paced Overview

Using the Solution Grid

Problem:

How much would you have to deposit today in order to have $500,000 in 20 years? Assume you can earn annual interest of 3.5%.

Steps

  1. Read the problem thoroughly.
  2. Make sure you know what you're being asked to do.  In this problem you're being asked to determine how much you would need to deposit today to meet a specific amount in the future.
  3. Prepare a solution grid.  In this problem you are told nothing about intra-year compounding, so assume annual compounding. Therefore, set 1 P/YR.

    P/YR
    1
    N I/YR PV PMT FV
    20 3.5 ? 0 500,000
  4. Clear the calculator.
  5. Enter all information in your calculator in the order laid out in the grid.

    The answer is:  $251,282.94

    The calculator keystrokes will be:

    C
      C ALL
    1    P/YR
    2  0  N
    3  ·  5  I/YR
    0  PMT
    5  0  0  0  0  0  FV
    PV
    CE/C
    2nd CLR TVM
    2nd P/Y  1  ENTER  2nd QUIT
    2  0  N
    3  ·  5  I/Y
    0  PMT
    5  0  0  0  0  0  FV
    CPT  PV

The answer is displayed on your calculator as a negative value, which indicates that you would have a cash outflow in the present to receive a cash inflow in the future. Remember that cash outflows should always be a negative value.

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