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Problem 2-5
Time to reach a financial goal You have $42,180.53 in a brokerage account, and you plan to
deposit an additional $5,000 at the end of every future year until your account totals $250,000.
You expect to earn 12 per cent annually on the account. How many years will it take to reach
your goal?
Solutions
Answer (Excel calculation)
Step 1
We will make use of the excel function NPER to get this answer. This function returns the
number of periods required for a series of cash flow to grow into a target value at fixed interest
rate. The inputs are:
Rate,
PMT
PV
FV
Type
Step 2
Please see the snapshot from the excel model. The last row highlighted in yellow is your answer.
Figures in parenthesis, if any, mean ne...
FV= c*((1+r)^n-1)/r
= 5000*(1.12^n-1)/0.12
To find the FV of a lump sum:
FV= c*(1+r)^n
= 42180.53*(1.12)^n
Now:
$250,000 = 5000*(1.12^n-1)/0.12 + 42180.53*(1.12)^n
Since calculations are complicated, I have used excel to answer the problem, but you can use a
financial calculator as follows:
Using your financial calculator, enter the following data: I = 12;
PV = -42180.53; PMT = -5000; FV = 250000; N =? Solve for N = 11. It will take
11 years for John to accumulate $250,000
Problem 2-34
Amortization schedule
Answer
Step 1
The table that shows the complete payments until the loan amount is totally paid off is known as
amortization schedule.
Step 2
Given:
Step 3
Annual payments can be calculated as:
Step 4
Amortization schedule:
Part b
Step 5
Percentage of principal and interest is shown below:
Step 6
Calculations:
First year:
Step 7
Second year:
Step 8
Third year:
Step 9
Answer: These percentage will change because the amount of loan is repaid and the balance
payment is reduced. Hence, the amount of interest reduces every year.