ESSAY Time Value of Money Assignment

Buy Time Value of Money Assignment

Scenario

Mariposa worked at a design firm for five years. Each year, she contributed $4,260 in order to maximize the company’s matching investment and reduce her income taxes. After five years, with an annual return of 8% per year, Mariposa’s 401(k) had a value of $25,000. Then Mariposa accepted a new job (which came with a raise) in the marketing department at Just Running. Congratulations, Mariposa! Because she is switching jobs and employers, she has a decision to make about what to do with her old 401(k).

She is considering the following options:

1. Roll It Over: Mariposa could take the $25,000 and rollover, or move, the total amount into her new 401(k) at Just Running. She would not have to pay income taxes or any penalties for this choice.

2. Buy A Home: Use part of the funds as a down payment on a home and rollover the rest: Mariposa could take $10,000 (without a penalty for an early withdrawal) from the funds from her old 401(k) to use as a down payment on a home. She would then rollover the rest of the funds into the new 401(k).

3. Cash It Out: Mariposa could spend the $25,000, but she would have to pay income taxes on the total amount as well as a 10% early withdrawal penalty.

Instructions:

Note: This assignment will be developed in the webtext templates and submitted in Week 3.

To help Mariposa decide what to do, you will need to determine the value of the new 401(k) in 40 years for each option. Thanks to the raise and the company match at her new job, Mariposa is able to contribute $5,000 per year to her new 401(k). You can assume Mariposa will get an average annual return of 8% per year (rate). The spreadsheet templates in the webtext will guide you through the calculations to determine future value (FV).

Part 1

For each option, you will need to enter the following four time value of money (TVM) variables in the spreadsheet to calculate the future value (FV) of each investment:

· Interest rate (rate).

· N (number of years).

· PMT (payment).

· PV (present value).

Part 2

After entering the information about Mariposa’s investment into the spreadsheet and calculating the future value, answer the following questions:

· Review Mariposa’s Three Options:

. Which option provides the highest future value of Mariposa’s 401(k) in 40 years?

· Considering the future value calculations and the experimental changes you just did, discuss the importance of each variable (PV, R, N) in terms of FV at the end of Mariposa’s career (when she retires):

. What is the importance of time (N)?

. What is the importance of the interest rate (R)?

. What is the importance of the initial amount of money Mariposa chooses to invest (PV)?

Note: Keep in mind that the actual long-term cost of cash-in (contributions) is actually much higher than this simple example, since PMT typically increases as one receives raises.

The specific course learning outcomes associated with this assignment are:

· Explain the fundamental concepts of finance in business and personal contexts.

· Calculate the future value of investment strategies.

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