FIN 200: Personal Finance

1. FIN 200: Personal Finance Topic 7-Project and Annuities Lawrence Schrenk, Instructor

2. Project Guidelines

3. Downloading and Opening the Project Spreadsheet • Login to Blackboard • ‘Course Documents” • Right click on project link, and “Save target as...” • Close Blackboard • Double-click on project to open Excel • Do you have Excel installed? • Use only this version of the project.

4. Blackboard

5. Opening the Project • “Disable Macros?”–Yes • What are ‘macros’?

6. Inside the Project • Click on the ‘index’ tab.

7. Project Index Page

8. Project Worksheets • Excel ‘Lingo’ and Basic Procedures • Worksheets (or ‘Sheet’) • Cells • References, “G20” • Protected versus Unprotected Cells • Click on Cell, Type, Hit Return • Two Worksheet ‘Inputs’ • Text • Numbers

9. Text Inputs

10. Numbers Inputs–Auto-Functions • Dollar Values • 2000 to $2,000–No commas in numerical inputs. • Percentage • Input 12% as ’12’ like Calculator • Calculations • Calculations are Programmed and Automatic • No text in numbers cells! • #VALUE!

11. Numbers Inputs–Auto-Functions

12. Project Guidelines • Instructions on Individual Worksheet • See Project Web Page • Perspective: • 2-3 Years after Final Year of Education • Realistic Data • Web Research • Common Sites • Unique Sites • Ask for Help

13. Progress • One or Multiple Worksheets per Topic • Worksheets Organized by Topic, not Chapter. • Weekly Progress Expectations • Periodic Review • Blackboard–’Project 1 Review’, etc. • Not Graded • Final Submission • Don’t put anything in the ‘Digital Drop Box’.

14. CAUTION • Do not give out private information to web sites. • Best Case–Insurance agents will call you for years. • Worst Case–Identity Theft. • Project web page has suggestions for individual worksheets. • I can always help.

15. Uploading the Project I

16. Uploading the Project II

17. Requirements I • Own a car (financed with a car loan), • Own a house (financed with a mortgage), • Have a credit card on which you have some (non-trivial) balance. • Have the following insurance policies: • Medical • Life • Auto, and • House.

18. Requirements II • Save for retirement. • Plan to leave a bequest (i.e., money in you will) to someone or an organization, e.g., a charity. • If you want to alter these, let me know, but you need to do something in each category. • Complete all worksheets.

19. Annuities: Present and Future Value

20. Annuities • An annuity is • A series of constant payments • That occur at regular intervals and • Do not continue forever. • NOTES: • The first payment occurs next period (not now). • Payments are annual. We will do non-annual later. • If the payments go on forever, it is called a ‘perpetuity’ (but we don’t need to study them).

21. Annuity Example • You want to buy a car by saving $2,000 per year, rather than depositing the entire amount (present value) now. • This is the more common way to save for a large purchase or for retirement. • Not many of have the present value of our retirement needs right now! • To have $1,000,000 at your retirement in 50 years (at 3% interest), deposit $228,107.08 today. ▪ • Why the low interest rate? ▪

22. Annuity Time Line • The constant cash flows of a 3 year annuity of $100.00 per year at 10%: I/Y I/Y I/Y 1 0 2 3 PMT PMT PMT 10% 10% 10% 1 0 2 3 Payments begin next period. $100.00 $100.00 $100.00 ▪

23. Uses of the Annuity Calculation • Our Key Calculation • Present Value of an Annuity • ‘Borrowing’ Problems (Loans) • How much can I borrow (PV)? • How much are my payments (PMT)? • What interest rate am I getting (I/Y)? • How long will it take (N)? ▪ • Future Value of an Annuity • ‘Savings’ Problems (Retirement Fund) • How much will I have (FV)? • Ditto ▪

24. Present and Future Value of an Annuity • We can either find the present value or the future value of an annuity • Note the asymmetry! ▪ I/Y I/Y I/Y 1 0 2 3 PV PMT PMT PMT I/Y I/Y I/Y 1 0 2 3 PMT PMT PMT FV ▪

25. The Annuity Calculation • For an annuity we have five possible inputs: • PV, FV, I/Y, N, PMT • But we will often only use four of them at a time: • PV, I/Y, N, PMT • FV, I/Y, N, PMT • As before, you input three variable and your financial calculator will give the fourth as a result. • Make sure the unused input, PV or FV, is zero.

26. Future Value with a Calculator • How much do we have after 3 years if we save $200 per year beginning next year and the interest rate is 12%? • Input 3, Press N • Input 12, Press I/Y • Input 200, press +/-, press PMT(you get -200) • Press CPT, FV to get 674.88, i.e., $674.88 NOTE: As before one (and only one) of the dollar value inputs must be negative.

27. Future Value with a Calculator 12% 12% 12% 1 0 2 3 $200.00 $200.00 $200.00 $674.88 Remember to press CPT, before FV (if necessary).

28. Future Value of an Annuity Practice Problems • How much will you have if you save $100.00 per year for 25 years at 8%? • $7,310.59 • How much will you have if you save $1000.00 per year for 5 years at 7%? • $5,750.74 • How much will you have if you save $1.00 per year for 50 years at 10%? ▪ • $1,163.91 ▪

29. Present Value with a Calculator • What is the present value of $200 per year for 3 years beginning next year, if the interest rate is 12%? • Input 3, Press N • Input 12, Press I/Y • Input 200, press +/-, press PMT(you get -200) • Press CPT, PV to get 480.37, i.e., $ 480.37 NOTE: As before one (and only one) of the dollar value inputs must be negative.

30. Present Value with a Calculator 12% 12% 12% 1 0 2 3 $480.37 $200.00 $200.00 $200.00 Remember to press CPT, before FV (if necessary).

31. Present Value of an Annuity Practice Problems • What is the present value of $100.00 per year for 25 years at 8%? • $1,067.48 • What is the present value of $1000.00 per year for 5 years at 7%? • $4,100.20 • What is the present value of $1.00 per year for 50 years at 10%? ▪ • $9.91 ▪

32. Using PV and FV Keys • There are situations in which you need all five buttons, i.e., both PV and FV. • Savings Problems/Future Value Problems • You have already accumulated some savings. • You want to know how much you will have in the future (FV) taking into account you currently have some amount saved (PV). • Your accumulated savings is PV.

33. PV and FV Timeline • How much do we have after 3 years if we save $200 per year beginning next year, the interest rate is 12%, and we already have $500? 12% 12% 12% 1 0 2 3 $500.00 $200.00 $200.00 $200.00 ???

34. PV and FV problems • How much do we have after 3 years if we save $200 per year beginning next year, the interest rate is 12% and we have already saved $500? • Input 3, Press N • Input 12, Press I/Y • Input 500, press +/-, Press PV (you get -500) • Input 200, press +/-, press PMT (you get -200) • Press CPT, FV to get 1377.34, i.e., $ 1377.34 • NOTE: In this type of problem both dollar inputs must be negative.

35. PV and FV with a Calculator 12% 12% 12% 1 0 2 3 $200.00 $200.00 $200.00 $200.00 $ 1377.34 Remember to press CPT, before FV (if necessary).

36. PV and FV Practice Problems • How much do we have after 3 years if we save $500 per year beginning next year, the interest rate is 12% and we have already saved $1,000? • $3,092.13 • How much do we have after 3 years if we save $200 per year beginning next year, the interest rate is 8% and we have already saved $500? ▪ • $1,279.14 ▪