SUMMARY5
1. Describe opportunity costs, or the value of what was lost when choosing between two or more options, you have encountered in your life.
Explain the difference between future value and present value.
Explain how the frequency of compounding affects the growth of a person’s money.
Describe a situation for which a person might use the future value of a series of amounts calculation.
In which situations would a present value calculation be used?
For these situations, decide if the event is an example of a future value calculation or a present value calculation:
Fatemah has invested SAR 6,000 with an annual rate of 2.5%. What would be the earnings on this amount?
Nora has invested SAR 850. What would be the future value in six years at an interest rate of 7%?
Saad plans to invest SAR 6,400 a year for the next six years, earning 4% interest. What would be the future value of this savings amount?
Ibrahim invests SAR 6,000 a year into a retirement account. If these funds have an average earning of 9% over the 40 years until retirement, what will be the value of the retirement account?
If Layla hopes to have SAR 60,000 for a down payment for a house in five years, what amount would she need to invest today? Assume that the money will earn 5% interest.
Abdullah is planning to go to graduate school in a program of study that will take three years. He wants to have SAR 12,000 available each
What amount would Mariam have to invest today to be able to take out SAR 800 a year for 10 years from an account earning 8% interest?
What amount would Tala have to invest today at a 6% rate of interest to have SAR 1,000 five years from now?
Time used for recreation is considered to be a financial resource.
A present value of a savings account would be larger than the future value of that account.
Match the terms listed with their definitions. Write the letters of the correct definitions.
KEY FORMULAS
Time Value of Money for Investment Calculations
What would be the future value of Asma’s investment after 20 years?
Would you advise Asma to deposit the 12,000 once as a single amount at the beginning of the investment program or as an annuity at the end of each year? Explain your answer.
Time Value of Money and Personal Financial Decisions
What financial goals do Younis and Ayesha need to set?
What do Younis and Ayesha need to start planning for from today, and how?
CASE STUDY: SELECTING A CAPITAL PROJECT
Taking a new product to market.
What are the present values of the two options?
Comparing the present value of the two projects with their costs, which project will the company choose?
Which other factors should the company consider when deciding which project to select?
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