Present and Future Values
Essay by cepfri • May 13, 2015 • Term Paper • 921 Words (4 Pages) • 1,083 Views
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Present and Future Values
The main aim of this paper is to find future and present values of retirement based investments. Being able to determine the best investments to make prior to the investments period, ensures that one is in a position to enjoy a comfortable life at old age and after retiring from his or her job (Bodie, Alex and Alan 5-7).
1.
The stocks at American Tower Corp were trading at $42 per share five years ago however, as at 2015 the price of these stocks had increased to $ 96 per share. (barchart Trader, 2015)The rate of the increase over the period as such can be said to be 0.25 annualy. This implies that over the 5 years period the value of the company’s stock increased approximately 125 percent.
Index value (5 Years ago)/Present Value | Current index value/ Future Value | Period | 5 Years’ return/ Rate |
$42 | $96 | 5 years | 0.25 |
As such, when using the rule of 72, it is estimated that for the investment in this company, at the current rate of 0.25, the stocks are likely to double after approximately 2.88 years
2.
The table below gives the present value of three accounts in a period of 32 years.
Future Value | 5 Years’ Return | Number of years before retirement | Present value of the investments |
$1000000 | 0.25 | 32 years | 792 |
$2000000 | 0.25 | 32 years | 1585 |
$4000000 | 0.25 | 32 years | 3170 |
It is clear from the table above that one million dollars will have an equivalent value of $ 792 today, while four million has an equivalent value of approximately $ 3170 today. This is after a similar time frame of 32 years. This is due to the high discounting rate
3.
The table below represents the future values of three different lifestyles.
Present Value (Has been Given) $ | Rate of Inflation (Average) | years remaining before retirement | Future Value $ |
50000 | 3% | 32 years | 130000 |
100000 | 3% | 32 years | 260000 |
150000 | 3% | 32 years | 390000 |
To maintain a $150000 lifestyle as of today after retirement, it will be necessary for one to spend approximately $390000 after a period of 32 years.
4.
For one to manage to lead these lifestyles after retirement, at a rate of 12%, it will be paramount for he or she to save the sums indicated in the table below.
Future Value ($) | Expected rate | Retirement years | Present value ($) |
130000 | 12% | 23 | 50063 |
260000 | 12% | 23 | 100126 |
390000 | 12% | 23 | 150189 |
To maintain and lead a $130000 worth lifestyle after one retires, he or she will have to save approximately $50,063 before retirement.
5.
The table shows what one will need to save annually in order to enjoy the lifestyles after retirement
Present Value ($) | Expected return in 5 years’ (%) | Years before retirement | Contributions to make annually |
50063 | 1.35 | 32 | 6008 |
100126 | 1.35 | 32 | 12015 |
150189 | 1.35 | 32 | 18023 |
Present Versus Future Values:
The present value refers to Changes value significantly over a period of time. This is given by the fact that money earns interest rates and is also affected by different inflation rates. To assist investors determine the values of investments in future and in present, the present values as well as future value concept is used (Porter 35-37).
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