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10. Extra Credit (Time Value of Money, worth 10 additional points): Here is the example problem, you have just received a gift of $100,000 in a trust fund from a long-lost uncle who just passed away. He stipulated in his will that you could not access the money until you are 30 years of age (and hopefully more responsible ). Assume the following: You are currently 20 years of age Expect the fund to have an annual return of 7.5% How do you calculate how much you will have at age 30 when you can withdraw the funds (the future value)? Future Value Recipe FV = Future Value PV = Present Value, 100,000 i= Annual Rate of Return, .075 n=number of periods, (30 yrs old -20 yrs old) = 10 years Remember: ^" means raised to the nth power (exponential), and reflects the compounding effect of earning interest on interest over time. You should be able to calculate (1 +R)^n using a calculator or Excel. Example: FV = PV * (1 + i)^n FV = 100,000 * (1 +.075)-10 FV = 100,000 * (2.061) = $206,100 . Now it is your turn to solve a similar problem (must show your work) Your trust fund is currently worth $250,000 You are 20 years of age and you will get access when you are 42 Expect the fund to have an annual return of 8.25% What is the expected future value of your portfolio when you turn 42? (round to the nearest whole dollar) For fun, if you want, put it in an Excel spreadsheet to solve it initially and then play around with the numbers, rate of return, number of periods, initial amount. Notice how the value grows significantly higher the longer the period of time where you let it grow without touching the value this is compounding

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