time value of money

time value of money - • =pv(rate,nper,pmt[fv[type 4 Third...

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11/14/10 1 A quick tour of the time value of money
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11/14/10 2 Theory: We would rather have a dollar today than have a promise of a dollar in the future If we have the dollar today, we can invest it and get back more next year. If we wait a year to get the dollar, there is some risk that we won’t receive the dollar. We have some preference for current consumption.
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Identifying the correct question 1. Do you want to know what a single amount is worth in the future? =fv(rate, nper,pmt ,[pv ],[type]) 2. Do you want to know what a series of payments (annuities) is worth in the future? =fv(rate, nper, pmt ,[pv],[type]) 11/14/10 3
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Question often used in accounting What is the current or present value of a single amount (FV) to be received in the future? =pv(rate,nper,pmt,[fv],[type]) What is the current or present value of a series of payments (annuities) to be received in the future?
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Unformatted text preview: • =pv(rate,nper,pmt,[fv],[type]) 11/14/10 4 Third important question • If we buy an item today, what stream of payments would return the amount we spent today (Principal) and an acceptable interest rate? • =pmt(rate,nper,pv,[fv],[type]) 11/14/10 5 Type? • Ordinary annuity (Type = 0) when first payment is received at the end of the period. • Annuity due (Type = 1) when first payment is received immediately. 11/14/10 6 Other important notes • Rate= annual rate. – Quarterly is rate/4 – Monthly is rate/12 – Daily is rate/365 • Nper = number of periods – If using quarterly rate take nper * 4 – If using monthly rate take nper *12 – If using daily rate take nper * 365 • PV = current value or present value taking time value of money into consideration • FV = future value taking time value of money into consideration 11/14/10 7...
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