Please complete the following discussion and please use the sources attached as reference.
Long-term investments extend beyond one year, and perhaps beyond many years. While any investment demands careful research and planning, long-term investments require especially careful planning. In both cases, the decisions must also consider risk.
Based on the concept of the time value of money, consider the two following potential investments. Using the concepts learned in this class, compile data and develop an investment model for ONE of these projects below:
- Purchasing a home – Discuss the relevance of the purchase price, the interest rate and the term of the mortgage loan. Show the first 5 years of an amortization table and discuss how the payment would change if one or more of the variables were different, i.e. if a 15-year mortgage were selected instead of a 30-year mortgage, or if a different interest rate were used. Which configuration of variables produces the best scenario?
- Saving for retirement – Discuss the significant differences between bonds or savings accounts as investment choices. Explain how compounding can affect the outcome of your investment. Give an example of how a modest $1000 investment could grow over time, and compare that with the results if money were invested periodically over time, rather than all at once up front, say $100/year for ten years. Which investment makes the most sense?
Some other important considerations are:
- How will inflation, depreciation or increase in value affect your plan?
- Should the method and costs of financing the project be part of the analysis?
- Are there any tax advantages to one investment or another?
References to use:
TeachMeFinance.com – read topics:
a) The Time Value of Money, http://www.teachmefinance.com/timevalueofmoney.html
b) Annuities, http://www.teachmefinance.com/annuities.html
d) Future Value of Uneven Cash Flow, http://www.teachmefinance.com/futurevalueofanunevencashflow.html