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# I need help understand future/present value and amoritization?! --I

I need help understand future/present value and amoritization?!

--I don't quite understand how to know which index you use for solving different problems

Dave CPA :

Hello,

Dave CPA :

Typically for present value you need to use the rate for each year you are discounting.

Dave CPA :

http://jcooney.ba.ttu.edu/fin3322/Brealey%20Files/Appendix%20A%20-%20Present%20Value%20Tables.pdf

Dave CPA :

Here is the rate table.

Dave CPA :

Hello I see you are in the chat

Customer:

Hi, yes I am. I am having trouble understand future/present value. I know there are different tables, but I am unsure as to know when to use which.

Dave CPA :

Well for present value you would use the one I just sent.

Dave CPA :

Does that make sense?

Customer:

1. Assume that you need to calculate either a present or future value. Which interest rate column and

number of periods do you use when working with the following rates and years?

(a) 8% compounded quarterly for 4 years i = ______% n = ______

(b) 12% compounded annually for 5 years i = ______% n = ______

(c) 6% compounded semiannually for 3 years i = ______% n = ______

(d) 12% compounded monthly for 2 year i = ______% n = ______

1. Sam Riggs makes a \$4,000 deposit in a savings account that earns 4% compounded annually. How

much will Sam have in the account after 5 years, assuming he makes no additional deposits?

Balance of account = \$_______________

1. Bob Thompson expects to invest \$10,000 at the end of each year into an account that earns 5%

compounded annually. How much will Bob have in the account at the end of 6 years?

Balance of account = \$_______________

1. Ann Summers wants to have \$20,000 available for graduate school tuition when she graduates from SCSU four years from now. How much must Ann deposit today in an investment account that earns 6%

compounded semiannually in order to meet her goal?

Current deposit = \$_______________

1. How much can XXXXX XXXXX borrow if she agrees to pay the loan in three annual payments of \$10,000 at the end of each year? These payments include interest at 7%, and the first payment is made one

year after Mary borrows the money.

Amount borrowed = \$_______________

1. XXXXX XXXXX is offered the possibility of investing \$2,750 today and in return to receive \$10,000 after

15 years. What is the annual rate of interest for this investment?

i = ______%

1. Megan Brooks is offered the possibility of investing \$6,650 today at 6% interest per year in a desire to

accumulate \$10,000. How many years must Brink wait to accumulate \$10,000?

n = ______ years

1. You just purchased a lottery ticket and can imagine winning the big jackpot of \$96 million. You have the choice of a lump sum payout or annual payments of \$4.8 million at the end of each year for the next 20 years. The interest rate used to determine the lump sum payout is 5%. What is the amount of

the lump sum payment?

Lump Sum = \$_______________

Customer:

Those are sum examples, I'll look at the chart

Customer:

I do know that you look at the year and percent to find the number to multiply by. I guess my question is when reading these problems how to interpret whether it is present or future? In order to know which table to get the numbers from

Dave CPA :

So for the Sam Riggs problem you want to know the future value because that is in the future.

Dave CPA :

Same with Bob Thompson

Dave CPA :

Ann Summer is present value as you know the amount in the future

Dave CPA :

XXXXX XXXXX is present value

Dave CPA :

Are you getting the idea?

Customer:

I think so. Now when it comes to calculations- how do you decide when its an annuity?

Dave CPA :

An annuity is a fixed payment at the same amount.

Dave CPA :

https://www.box.com/s/ou0lmj1ft5ddv7rptyax

Dave CPA :

If you have excel here is a sheet that has the present value and future value formulas.

Dave CPA :

as an example

Customer:

I do have excel

Dave CPA :

Take a look at the formulas

Customer:

Okay, I haven't used excel a whole lot, but I think I kind of understand what you are doing.

Dave CPA :

So for Bob T you should come out to \$4,867

Dave CPA :

Sorry I meant Sam Riggs

Dave CPA :

For Bob T you should have \$13,401

Dave CPA :

Are you getting the idea?

Customer:

So for Bob T would it be future value and annuity?

Dave CPA :

Yes

Dave CPA :

Do you have any other questions on which one to use?

Customer:

When calculating annuity and lump sum is the only real difference going to be which appendix you are looking at?

Dave CPA :

Yes

Customer:

Okay, I think I have a better understanding. I guess the only thing is with some of the wording on the different questions I feel like can be tricky when trying to distinguish whether it is future or present. Any tips on that? I obviously know if they say at the end of x amount of years- thats future.

Dave CPA :

Think of it this way.

Dave CPA :

If they say you will have \$20,000 in ten years you need to think back to present value

Dave CPA :

If they say you have \$20,000 right now and what will it be in the future...You need to think future value

Dave CPA :

When you read the problem look at where the money is. Is it in the future or present and then work out the opposite.

Customer:

Okay so that's problem. I feel like I am looking too much into the problems. When I read you will have "\$20,000 in ten years" that makes me think future, because I don't currently have it.

Dave CPA :

That is correct and you need to figure the present value.

Customer:

For the appendix that you found- they all are going to be the same I'd assume? Meaning, where you found this- should appear in other accounting textbooks/sites?

Dave CPA :

Yes that is standard

Dave CPA :

do you need anything else?

Customer:

I think that should be all. I am going to just keep working away at practice problems. Thank you.

Dave CPA :

Please provide a positive rating. I really enjoyed helping you tonight. Regards Dave