Question

(1) If you have a $100,000 left as an inheritance by your beloved Aunt Lacy, what would the future value of that $100,000 be when you retire? You have to determine for yourself when you are going to retire and the number of years until that age. You will also have to assume an interest rate to use in your calculation. Now add 2% to the interest rate you assumed; redo the calculation. (2) If you decide that you need $1,000,000 to retire in luxury, how much "capital" would you have to have today to achieve that goal. Use the number of years and the interest rates from (1) above. (3) What other factors are you "holding constant" in doing these calculations? (4) What is the connection between the "interest rates and the "opportunity cost of capital"?

Answer 1

Part 1 and 2 has already calculated separately using compounding method.

Part 3 Assumptions

1. rate of interest rate remain fixed
2. time period remain fixed
3. method for calculation i.e compounding is fixed

Part 4 - Interest rate is the rate at which we deposit or lend money for specified period of time. Opportunity cost is the value of benefit foregone by choosing next best alternative. For example you have 2 jobs opportunities. 1st job is paying $50000 annually and next is paying $40000. If you choose 1st you have to forget 2nd option. This is known as opportunity cost.

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