The Value of Money

Reggnia Gilchrist

Argosy University

LASA 1 Time Value of Money

A. The future value of a dollar amount put into a savings account reflects what we expect the value of the dollar amount to be in a fixed amount of time, or how we expect the money to grow. Growth or in this case savings account, the interest rate paid, is the amount that we have deposited. Mary has been depositing $500 in her savings account for the last 19yrs, which earned %5 per year, compounded annually. Mary will make one more $500 deposit one year from now. The goal is to find out how much will Mary’s account will be worth at that time. The initial balance was $500 with an interest rate of %5, this means that the end of the first year the balance was $ 525. $500($500=0.05%) or $500+ $25.00, the $25.00 is the amount earned from interest. Interest in this account is compound interest, which means that interest is earned on the original balance, plus whatever interest has been added. Therefore, at the end of the second year, the amount on which interest was paid was the balance at the end of the first year, $525, which is the principle balance and the interest earned at the end of the first year. Now the formula that I will use to calculate the growth of Mary’s money over a 20year period would be FV= PV * (1+I)n

FV= Unknown (future value or the value at the end of a time period)

PV= $500 (present value, the amount that was initially invested or deposited)

I= %5 (interest paid on the account)

N= 20(number of time period/years)

FV=500*(1+0.05)20

Mary savings account will be worth $1.326.65 if she deposits $500 in her account every year for a 20year period.

B.) Mary has been working at the University for 25 years, with an excellent record of service. As a result, the board wants to reward her with a bonus to her retirement package. They are offering her $75,000 a year for 20 years, starting one year from her retirement