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Tutorial 2 : Time Value of Money
Conducted by : Mr. Chong Lock Kuah, CFA

1
Key Points
•
The first step in time value analysis is to set up a time line, which will
help you to visualize what is happening in a particular problem
CF
2
CF
1
CF
3
I/YR
0
1
2
3
Year
Cash flows
1.
Time 0 is today; Time 1 is the end of period 1; or the beginning
of period 2
2.
Negative CF (-CF) are cash outflows

2
Key Points
•
FV is the amount to which a cash flow or series of cash flows will
grow over a given period of time when compounded at a given
interest rate
•
PV is the value today of a future cash flow or series of cash flows
•
Annual Percentage Rate (APR) is the contracted, quoted or stated
interest rate.
It is equal to periodic interest rate times the number of
period per year
•
Effective Annual Rate (EAR or EFF) is the annual interest rate
actually being earned (or paid), as opposed to the quoted rate. An
EAR is the interest rate expressed as if
it were compounded once
per year

3
Key Points
square4
Solving time value of money problems using financial calculator TI II Plus is a preferred
method
square4
Before using a financial calculator, make sure that
the calculator is set up as follows:
square4
P/Y is set equal to 1,
hit
square4
Make sure that the calculator is in
“End Mode” (default setting)
square4
Set the calculator to display 8 decimal places, hit
square4
Clear all memory
hit
and hit
square4
Always make sure that the interest rate and the time period match.
For example, when there
are more than one periods in a year, use periodic interest rate (APR/m where m is the
compounding frequency per year) and input N= number of periods per year x number of yrs
square4
For example, APR =10% and the compounding frequency is twice per year and you enter in
the financial calculator as I/Y =5 and then enter N= 2x number of years
2ND
.
FORMAT
1
2ND
8
2ND
FV
CLR TVM
I/Y
P/Y
2ND
CE/C
CLR WORK
ENTER
SET

4
Key Points
•
When calculating the PV of an ordinary annuity,
100
100
100
10%
0
1
2
3
Year
Ordinary
Annuity
Using a financial calculator input:
N = 3, I/Y = 10, PMT =100, FV
= 0, and then solve for PV = -$248.69

5
Key Points
•
When calculating the PV of an annuity due,
100
100
10%
0
1
2
3
Year
Annuity Due
Using a financial calculator
Hit
and then enter :
N = 3, I/Y = 10, PMT =100, FV = 0, and then solve for PV = -
$273.55
100
2ND
PMT
BGN
2ND
ENTER
SET

6
Key Points
•
When calculating the PV of series of uneven cash flows,
We have to enter individual cash flows using
key
10%
0
1
2
3
Year
0
100
300
4
300
-50
NPV
= 530.09
NPV = -CF
0
+ PV(CF)
Since CF
0
= 0, NPV=PV(CF)
CF
CF
0
ENTER
SET
100
300
ENTER
SET
ENTER
SET
ENTER
SET
ENTER
SET
2
50
ENTER
SET
NPV
calculator will display I=0.000000, hit
And then hit
10
ENTER
SET
CPT
QUIT
↓
INS
↓
INS
↓
INS
↓
INS
+/-
RESET
↓
INS
↓
INS

7
Key Points
•
When calculating the FV of series of cash flows when payments
occur annually, but compounding occurs each 6 months,
I/YR = 10%
0
1
2
3
100
4
5
100
100
6
period
Here we can’t use normal annuity valuation techniques. You can
use the EAR and treat the cash flows as an ordinary annuity or
use the periodic rate and compound the cash flows individually.)

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- Spring '11
- tohmunheng
- Time Value Of Money, Annual Percentage Rate, Corporate Finance, Future Value, Net Present Value