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.
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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