Okay so my friend wants to buy a boat in 4 years that costs $150,000.
There is an investment that quarantees a 20 percent yield over 4
years. Therefore he wants to know what is the minimum he must invest
to accumulate $150,000 at the end of the 4 years?


You must provide all the working and formulas (preferably with an
explantion / definition) as I would really like to learn to do this
myself.

It is VERY important to me that the answer is ONE HUNDRED PERCENT correct!

Thank you!

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Request for Question Clarification by omnivorous-ga on 22 Sep 2004 11:32 PDT

Thanksmate --

If you'd like to repeat these calculations, it may be best to do them
in Microsoft Excel.  Are you comfortable working with a spreadsheet?

You'll also need to clarify the structure of the investment: does the
investment yield 20 percent per year over a 4-year period?  Or a total
return of 20% (about 5% per year)?  Realize that 20% is at the HIGH
end of expected investment returns when Treasury bills are 4.5%.

Best regards,

Omnivorous-GA

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Clarification of Question by thanksmate-ga on 22 Sep 2004 11:50 PDT

Hi!

Unfortunately I will not be using a spreadsheet.

The investment yields a total return of 20 percent over the 4 year period.

Thanks

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Request for Question Clarification by omnivorous-ga on 22 Sep 2004 12:44 PDT

Thanksmate --

This is such a simple calculation that I can't see charging you for it:

$150,000/1.2 = $125,000 invested today.

In other words, a contract to return $150,000 on Sept. 22, 2008 should
cost $125,000 today.  My 20% return would be .20 * $125,000 = $25,000.

$25,000 plus my initial $125,000 investment would be $150,000.

Best regards,

Omnivorous-GA

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Request for Question Clarification by elmarto-ga on 22 Sep 2004 14:05 PDT

Hi thanksmate-ga
Is the 20% return on the investment annual, or for the full 4 years?
The answer to this question would be quite different if the investment
guarantees 20% PER YEAR.

Thanks,
elmarto

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Clarification of Question by thanksmate-ga on 23 Sep 2004 02:04 PDT

Sorry! It is 20 percent per year.

Omnivorous-GA, do you intend to answer the other questions I posted?
Would be great if you could.

Thanksmate --

To get to $150,000 in 4 years, you can work this backwards:

Y4: $150,000/1.20 = $125,000, meaning you've earned $25,000
Y3: $125,000/1.20 = $104,166.67, meaning you've earned $20,833.33
Y2: $104,166.67/1.20 = $86,805.56, meaning you've earned $17,361.11
Y1: $86,805.56/1.20 = $72,337.97, meaning you've earned $14,467.59

You'd start with only $72,337.97.  So, your money more than doubles
with a 4-year investment at 20% per year!  (But don't buy that boat in
Florida during the hurricane season.)

As I'd mentioned before, a 20% return would be extraordinarily high. 
State lotteries use Treasury bill rates to invest returns: a 5-year T
bill is yielding 3.25% today.  The Wall Street Journal notes that
5-year Guaranteed Investment Contracts are yielding 3.86% this
morning.

Interest rates are the lowest guaranteed returns but stock market
returns during the 1990s (when inflation was higher) were 17.3% for
the S&P 500, according to the investment website Motley Fool.  For the
past 3 years, the S &P 500 has returned 15.3%:

The S&P 500 Index Fund
http://www.fool.com/mutualfunds/indexfunds/indexfunds01.htm

Note that I've done quite a few of these investment and Net Present
Value calculations on Google Answers (and in my career in finance). 
You can see how many are done by searching Google Answers for:
Omnivorous-GA + net present value

It's often easier to use a spreadsheet to show the complex
calculations, since many things are being done at once.  But I'll be
glad to look at the other questions if Livioflores doesn't succeed,
particularly since there seems to be some debate over question #
404796.

Best regards,

Omnivorous-GA

Thank you for your help and answering my question so fast :-)