Answer: Vanessa is a financial planner specializing in retirement savings. She realizes the importance
of using mathematical formulas and the appropriate tools to help her clients understand the
reasoning behind the advice she is giving.
One of her favorite tools is a time-value-of-money (TVM) calculator. In Student Activity
Sheet 4, you met Josephine, one of Vanessa’s clients who wanted to retire with $1 million
in savings.
1. In Josephine’s initial situation, she plans to retire in 50 years with $1 million in savings.
Vanessa advised her to find an account that earned at least the current rate of inflation.
Use this information to complete the table below.
Variable Definition of Variable Value in Josephine’s
Situation
FV future value, or value of the investment at maturity
t number of years of investment until maturity
i annual interest rate (as a decimal)
PV principal, or present value
n number of compounding periods per year
Vanessa uses a TVM calculator to help Josephine understand how the different variables
affect one another.
2. Identify the values in Josephine’s situation for each variable that the TVM calculator
uses.
Variable Definition of Variable Value in Josephine’s
Situation
N number of compounding periods between the
time of investment and the time of retirement
I% annual interest rate (as a percent)
PV principal, or present value
PMT amount of each regular payment
FV future value, or value of the investment at
maturity
P/Y
number of payments per year (usually the same
as the number of compounding periods per year,
C/Y)
C/Y number of compounding periods per year
Student: Class: Date:
Decision Making in Finance: Present Value of an Investment
VI.B Student Activity Sheet 5: A Cool Tool!
Charles A. Dana Center at The University of Texas at Austin Advanced Mathematical Decision Making (2010)
Activity Sheet 5, 6 pages
14
3. Use the TVM calculator to determine the present value (PV) of the investment required
to meet Josephine’s retirement goal. How does this amount compare to what you
determined in Student Activity Sheet 4?
Use the TVM calculator to answer the following questions for some of Vanessa’s other
clients.
4. Reginald wants to find the future value of an investment of $6,000 that earns 6.25%
compounded quarterly for 35 years.
Variable Definition of Variable Value in Reginald’s
Situation
N number of compounding periods between the time
of investment and the time of retirement
I% annual interest rate (as a percent)
PV principal, or present value
PMT amount of each regular payment
FV future value, or value of tStep-by-step explanation: