Exam (elaborations)
Calculations
- Institution
- University Of South Africa (Unisa)
Help on calculations
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How to calculate the Future ValueLet us take the following example:
The Saint James Abby hotel in Paris is upgrading its facilities; and wants to build an in-
house spa and an additional wing with luxury rooms. However, before proceeding with
the project they would like to know what these investments will be worth to them in five
years’ time. The hotel has appointed you as the financial advisor and provided the
following information regarding the two projects. The discount rate for both projects is
10%.
Spa Luxury wing
Initial investment R100 000 R180 000
Question:
The Future Value of the spa would be ____________ and_________________ for the
luxury wing in five years’ time.
Step 1:
Decide whether or not you must calculate the present or the future value of the investment.
In this scenario the question clearly states you need to calculate the FUTURE VALUE.
Step 2:
Determine the future value factor. The future value factor may be calculated by using the
formula given in the textbook [FVn = PV(1 + i)n ], with a financial calculator or by using the
tables provided in the textbook which has already calculated the future-value factors for you.
HOWEVER, PLEASE DO NOT TRY TO CALCULATE THE FUTURE-VALUE FACTORS
YOURSELF. Firstly, you will not be allowed to make use of a financial calculator in the
exam. And secondly, if you choose to use the formula your answer will be influenced by
decimals according to your calculator’s pre-set format and you will not arrive at the same
answer as your lecturer. It is much easier to use the table than to calculate the formula
yourself. In addition, the tables will be given to you in the examination.
As we have already determined we want to calculate the future value, you must make use of
the table to calculate future values (Table 14.3). This table will be given to you in the exam
as well so there is no need to study it off by heart. To “calculate” the future-value factor
simply check the corresponding column (interest rate) with the corresponding row (period =
years). To illustrate, the future value-factor we are looking for based on the scenario above
is the row for year (period) 5 and the column for the interest rate of 10%.
Discounting factors to calculate future values
Periods (n) 5% 10% 15%
1 1,0500 1,1000 1,1500
2 1,1025 1,2100 1,3225
3 1,1576 1,3310 1,5209
4 1,2155 1,4641 1,7490
5 1,2763 1,6105 2,0114
6 1,3401 1,7716 2,3131
The future-value factor then is 1,6105.
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