Calculating opportunity cost worksheet

Time Value of Money, Opportunity Cost, and Income Taxes Worksheet

FP/100 Version 1

1

University of Phoenix Material

Time Value of Money, Opportunity Cost, and Income Taxes Worksheet
Scenario 1: Time Value of Money / Cash Management Products

1. Use this Bankrate’s Simple Savings calculator to complete Scenario 1: http://www.bankrate.com/calculators/savings/simple-savings-calculator.aspx. You will enter the Initial Amount of Savings (Present Value), Annual Interest Rate (Rate of Return), and Number of Periods/Years into the calculator. The calculator will compute the Future Values.

In this scenario you will look at the impact of interest rates on your savings. Suppose that you have $2,000 of savings. You don’t anticipate needing to dip into these funds in the next five years. Based on the information provided in the table, calculate the future value (FV) of $2,000 at the end of years 1 and 5 if it were to be completely invested in each of the different cash management products.

Enter your answers in the indicated cells of the table below. The Restrictions/Fees on Product Usage column relates to question 2 of Scenario 1.

Product

Annual Interest Rate

Restrictions/Fees on Product Usage

FV at end of Year 1

FV at end of Year 5

Checking Account

0.00%

· No minimum

· No limit on withdrawals

Answer: $2,000

Calculator Inputs:

Initial Amount: $2,000

Annual Interest Rate (compounded quarterly): 0.00%

Number of Years: 1

Answer: $2,000

Calculator Inputs:

Initial Amount: $2,000

Annual Interest Rate (compounded quarterly): 0.00%

Number of Years: 5

Savings Account

1.50%

· No minimum

· Limited to 3 withdrawals per month

Answer: $2,030.17

Calculator Inputs:

Initial Amount: $2,000

Annual Interest Rate (compounded quarterly): 1.50%

Number of Years: 1

Answer: $2,155.47

Calculator Inputs:

Initial Amount: $2,000

Annual Interest Rate (compounded quarterly): 1.50%

Number of Years: 5

Certificate of Deposit (CD)

5%

· $500 minimum balance

· Early withdrawal penalty: 180 days of interest plus $25

Answer: $2,101.89

Calculator Inputs:

Initial Amount: $2,000

Annual Interest Rate (compounded quarterly): 5%

Number of Years: 1

Answer: $2,564.07

Calculator Inputs:

Initial Amount: $2,000

Annual Interest Rate (compounded quarterly):

5%

Number of Years: 5

2. Based on your calculations and on all you have learned this week, how would you choose to save your $2,000? Consider things such as rate of return, inflation, taxes, liquidity, safety, restrictions, and fees, and explain the rationale for your decision. Respond in at least 50 words.

Scenario 2: Time Value of Money / Compounding Interest

3. Use this Bankrate’s Simple Savings calculator to complete Scenario 2: http://www.bankrate.com/calculators/savings/simple-savings-calculator.aspx. You will enter the Initial Amount of Savings (Present Value), Annual Interest Rate (Rate of Return), Interest Compounded, and Number of Periods/Years into the calculator. The calculator will compute the Future Values.

In this scenario you will start with a big deposit and see how interest, compounding, and time will change the balance over time. Suppose that you inherit $10,000 from your late uncle. You save this money and do not deposit any more money to the account. Determine how much money you would have at the end of each of the periods for each of the scenarios in the table below, assuming that you don’t make any withdrawals from the account over t