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FM12_Ch_02_Tool_Kit

# FM12_Ch_02_Tool_Kit - Chapter 2 The Time Value of Money...

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1/20/2007 Chapter 2. The Time Value of Money The "Chapter" worksheet performs the calculations required for Chapter 2, and was used to create many of the chapter exhibits (Tables and Figures). We pasted in a few dialog boxes for specific Excel functions and features and show then off to the right of where they apply, but in general we encourage students who want to know more about Excel to use the Excel Tutorial and refer to it as necessary. We also like to let students know that Excel models can be used to create tables and graphs that can then be copied into Word documents, which is the way we prepared the text manuscript for submission to the publisher. That procedure is used often in business to prepare reports. Although answers to the Self-Test questions within the chapter are generally quite easy and were found with a calculator, we also solved them with Excel as a check and also to provide some information on the solutions in case students have questions. The tabs at the lower part of this screen take you to these solutions. Even if students are not familiar with Excel, they should still be able to see the solution setup and then work out the answer with a calculator. Although we did not create the model specifically for use in lectures, it could be used as such in a classroom where a projector is attached to a computer. The instructor could scroll through the model and lecture on points as they come up. This would be more useful if the students have some familiarity with Excel, but that is not really necessary because everything the model does can also be done with a financial calculator. FUTURE VALUES (Section 2.2) A dollar in hand today is worth more than a dollar to be received in the future because, if you had it now, you could invest it, earn interest, and end up with more than a dollar in the future. The process of going to future values (FVs) from present values (PVs) is called compounding. To illustrate, refer to our 3-year time line and assume that you plan to deposit \$100 in a bank that pays a guaranteed 5% interest each year. How much would you have at the end of Year 3?

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Figure 2-1. Summary of Future Value Calculations -\$100.00 5.00% 3 Periods: 0 1 2 3 | | | | Cash Flow Time Line: -\$100 FV = ? Step-by-Step Approach: \$100 \$105.00 \$110.25 \$115.76 = \$115.76 3 5 -\$100.00 \$0 Calculator Approach: N I/YR PV PMT FV \$115.76 Excel Approach: FV Function: Fixed inputs: \$115.76 Cell references: \$115.76 The Compounding Process: A Graphic View Investment = CF 0 = PV = Interest rate = I = No. of periods = N = Formula Approach: FV N = PV(1+I) N FV N = \$100(1.05) 3 FV N = = FV ( I ,N, 0 , PV ) FV N = = FV ( 0.05 ,3, 0 , -100 ) = FV N = = FV ( C15 ,C16, 0 , C14 ) = In the Excel formula, the terms are entered in this sequence: interest, periods, 0 to indicate no intermediate cash flows, and then the PV. The data can be entered as fixed numbers or as cell references. Figure 2-2 (shown below) shows how a \$1 investment grows over time at different interest rates.
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FM12_Ch_02_Tool_Kit - Chapter 2 The Time Value of Money...

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