Financial Valuation (Time-Value of Money)

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Question 1

Barry learned in an online investment course that he should start investing as soon
as possible. He had always thought that it would be smart to start investing after he
finishes college and when his salary is high enough to pay the bills and to have money
left over. He projects that will be 5–10 years from now. Barry wants to compare the
difference between investing now and investing later. A financial advisor who spoke
to Barry suggested that a Roth IRA (Individual Retirement Account) would be a good
investment for him to start.
1. If Barry purchases a $2,000 Roth IRA when he is 25 years old and expects to
earn an average of 6% per year compounded annually over 35 years (until he is
60), how much will accumulate in the investment?
	Initial Investment (PV)
	Quoted Rate
	Compounding Frequency	Choose one
	Number of compoundings (m)	For Quarterly, type 4; for semiannually, type 2; for annually, type 1; for monthly, type 12; for daily, type 365
	Quoted Rate divided by m = RATE
	Number of Years
	NPER (Num. of years * m)
	Ending Amount (FV)

Question 2

At 45 years of age, Seth figured he wanted to work only 10 more years. Being a full-time landlord had a lot
of advantages: cash flow, free time, being his own boss—but it was time to start thinking toward retirement.
The real estate investments that he had made over the last 15 years had paid off handsomely. After selling a
duplex and paying the associated taxes, Seth had $350,000 in the bank and was debt-free. With only 10 years
before retirement, Seth wanted to make solid financial decisions that would limit his risk exposure. Fortunately,
he had located another property that seemed to meet his needs— a well maintained four-unit apartment. The
price tag was $250,000, well within his range, and the apartment would require no remodeling. Seth figured he
could invest the other $100,000, and between the two hoped to have $1 million to retire on by age 55.
2. Seth’s current bank offers a 1-year certiﬁcate of deposit account paying 2% compounded semiannually.
A competitor bank is also offering 2%, but compounded daily. If Seth invests the $100,000, how much more
money will he have in the second bank after one year, due to the daily compounding?
		Current Bank	Competitor Bank
		Semiannually	Daily
	Initial Investment (PV)
	Quoted Rate
	Compounding Frequency	Semiannually	Daily	Choose one
	Number of compoundings (m)			For Quarterly, type 4; for semiannually, type 2; for annually, type 1; for monthly, type 12; for daily, type 365
	Quoted Rate divided by m = RATE
	Number of Years	1	1
	NPER (Num. of years * m)
	Ending Amount (FV)
	Difference in FV		=D36-C36