Present value and future value

Water Cooler Investing
#1

My question will be simple for some of you:)

I get confused when being asked for present value and future value in complex questions.
Example:
What amount of capital will support a monthly income (before tax)of $3200 from investment assume MrX will live 20 years after they retire at age 65 and the nominal rate of return on their investments during retirement will be 6% compounded monthly. They plan to deplete the capital over 20 yrs with their first payment beginning one month after retirement begins.
Payment $3200; N20x12=240; I 6/12=0.5
Why are we looking for present value ???

Please help
Thank you!

#2

You’re going to invest the capital today to generate the future cash flows.

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#3

If you’re going to use N=240 and I=0.5, make sure you have P/Y=C/Y=1!!!

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#4

The problem gives you the FUTURE cash flows, which means you need to find the PRESENT value.

How much $$$ today (that’s the PRESENT) can generate X per month for X months at X rate?

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#5

Thank you all :slightly_smiling_face:

#6

Plus another clue is that they want to run the fund down to 0, so FV=0. Then the only variable left to calculate is PV.

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