Time Value of Money
Build a Model
Inputs:
PV
=
1000
I
=
10%
N
=
5
Formula:
FV = PV(1+I)^N =
$1,610.51
Wizard (FV):
$1,610.51
Experiment by changing the input values to see how quickly the output values change.
Years (D10):
Interest Rate (D9)
$1,610.51
0%
5%
20%
0
$1,610.51
$1,610.51
$1,610.51
1
$1,610.51
$1,610.51
$1,610.51
2
$1,610.51
$1,610.51
$1,610.51
3
$1,610.51
$1,610.51
$1,610.51
4
$1,610.51
$1,610.51
$1,610.51
5
$1,610.51
$1,610.51
$1,610.51
a.
Find the FV of $1,000 invested to earn 10% after 5 years.
Answer this question by using a
math
formula and also by using the Excel function wizard.
Note:
When you use the wizard and fill in the menu items, the result is the formula you see on the formula line if
you put the pointer on cell E12.
Put the pointer on E12 and then click the function wizard (fx) to see the
completed menu.
Finally, it is generally easiest to fill in the wizard menus by clicking on one of the menu slots
to activate the cursor in that slot and then clicking on the input cell where the item is given.
Then, hit the tab key
to move down to the next menu slot.
b.
Now create a table that shows the FV at 0%, 5%, and 20% for 0, 1, 2, 3, 4, and 5 years.
Then create a
graph with years on the horizontal axis and FV on the vertical axis to display your results.
Begin by typing in the row and column labels as shown below. We could fill in the table by inserting formulas in
all the cells, but a better way is to use an Excel data table as described in 07model.
We used the data table
procedure.
Note that the Row Input Cell is D9 and the Column Input Cell is D10, and we set Cell B32 equal to
Cell E11.
Then, we selected (highlighted) the range B32:E38, then clicked Data, Table, and filled in the menu
items to complete the table.
To create the graph, first select the range C33:E38.
Then click the chart wizard.
Then follow the menu. It is easy
to make a chart, but a lot of detailed steps are involved to format it so that it's "pretty."
Pretty charts are generally
not necessary to get the picture, though. Note that as the last item in the chart menu you are asked if you want to
put the chart on the worksheet or on a separate tab.
This is a matter of taste.
We put the chart right on the
spreadsheet so we could see how changes in the data lead to changes in the graph.
Note that the inputs to the data table, hence to the graph, are now in the row and column heads.
Change the 10%
in Cell E32 to .2 (or 20%), then to .3, then to .5, etc., to see how the table and the chart changes.
$1,500.00
$2,000.00