Question

You are required to use a financial calculator or spreadsheet (Excel) to solve 10 problems (provided on page 5) on the applications of the time value of money. You are required to show the following four steps for each problem (sample problems and solutions are provided for guidance): (i) Develop a timeline (linear representation of the timing of cash flows). (ii) Identify the time value of money variable (PV, FV, PMT, N, or I/YR) that needs to be solved/calculated in the question. (iii) Identify the values of the remaining variables (PV, FV, PMT, N, or I/YR) from the question— be sure to show positive or negative signs for the appropriate variables. (iv) Calculate the correct value of the variable identified in Step (ii)

1) On the day Harry was born, his parents put $1,200 into an investment account that promised to pay a fixed interest rate of 6% per year. How much money will Harry have in this account when he turns 21 (round your answer to two decimal places)?

Answer 1

1) Linear representation is as follows:

ii) The FV variable needs to be solved since we want to know the future value of the deposit.

iii) PV is the original deposit. PMT is the periodic deposit which is zero. N is the number of years which is 21, I/Y is the annual rate which is 6%

PV	-1200.00
PMT	0
N	21
I/Y	6%

iv) The FV is solved using FV function in Excel as $4079.48

Workings