Question

First Reply: Future Value & Present Value е Consider the section on "Interest" (especially in Section 17.3, the sub-section "Getting Rich the Slow, Boring Way" and the focus box "WORK IT OUT: Simple and Compound Interest," in Chapter 17, "Financial Markets" in the Greenlaw & Shapiro course textbook. (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? Second Reply: Review of Microeconomics Identify two lessons from microeconomics that you think will be most important to your own future. Try to find one lesson from "business economics," one lesson from "microeconomics applied to society." List and explain providing interesting examples!

Answer 1

1.

Given data:

Present value (Left as inheritance) = $100000

Assumed Data:

Interest rate = i = 10%

Years to retire = n = 25 years

Future value = F =?

Since it is not mentioned as to whether we have to take simple interest or compound interest into consideration we shall solve by using both the methods

Simple interest

F = P(1+in)

F = 100000(1+0.10*25)

F = $350000

Compound Interest

F = P(1+i) ^n

F = 100000(1+0.1) ^25

F = $1083470.59

2.

Given data:

Future value = $1000000

Assumed Data:

Interest rate = i = 10%

Years to retire = n = 25 years

Present value = P =?

Since it is not mentioned as to whether we have to take simple interest or compound interest into consideration we shall solve by using both the methods

Simple interest

F = P(1+in)

P = F/(1+in)

P = 1000000 / (1+0.1*25)

P = $285714.3

Compound Interest

F = P(1+i) ^n

P = F / (1+i) ^n

P = 1000000 / (1+0.1) ^25

P = $92296

3. The factors that are held constant are

1. The Interest rate is kept constant, In real life the interest rate tends to fluctuate, however here we consider it to be constant.

2. The inflation is also kept constant or is considered to be zero. If inflation is considered, then the same has to be subtracted from interest rate to find out the effective values.