Day 5 - Time Value of Money

# Day 5 - Time Value of Money - The Time Value The Time Value...

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Unformatted text preview: The Time Value The Time Value of Money Future Value Future Value Investment Interest or Yield Yield 10% = .1 50% = .5 8% = .08 6.5% = .065 Compound Interest ­­ Interest earning interest How often is interest added to investment principal Examples: annually, monthly, weekly, daily Annually \$1,000 @ 12% = \$120 Monthly Interest = \$10 Monthly \$1,000 @ 12% = \$126.83 Month 1 \$1,000 x .12 /12 = \$10 Month 2 \$1,010 x .12/12 = \$10.10 Month 3 \$1,020 x .12/12 = \$10.30 ___ ___ 10 % Investment 10 ___ = 1 = .1 \$1,000 x 100 10 = \$100 Annual Yield Future Value Computation Future Value Computation Beginning of Year End of Year 1 = 100% Investment Income \$1,000 x 1 = \$1,000 \$1,000 x .08 = _____ 80 \$1,080 \$1,00 1.0 x = \$1,080 \$1,08 0 1.0 8 x = \$1,166 0 8 Investment x (1 + Interest Rate) = Future Value Present x (1 + int) = Future Value End of year 1 Value 2 (1 + int) = Future Value End of year PV x 2 PV x (1 + int) n = Future Value Number of Payment Periods FUTURE VALUE FUTURE VALUE FUTURE VALUE FUTURE VALUE Future Value Computation Beginning of Year End of Year Investment \$100,000 x 1 = \$100,000 Income \$100,000 x .08 = 8,000 _______ \$108,000 1.0 \$100,000 x = \$108,000 1.0 8 \$108,000 x 8 = \$116,640 FUTURE VALUE EXCEL x Click the ‘Insert Function’ (f ) icon FUTURE VALUE FUTURE VALUE EXCEL The ‘Insert Function’ Box Appears FUTURE VALUE FUTURE VALUE EXCEL The ‘Insert Function’ Box Appears Type ‘fv’ Then click on the ‘Go’ icon Then click ‘OK’ FUTURE VALUE FUTURE VALUE EXCEL The function Excel utilizes appears as you type The ‘Function Arguments’ Box Appears Type ‘.08’ Type ‘2’ Type ‘0’ Type ‘­100000’ Type ‘0’ Then click ‘OK’ The calculated answer appears here even before you click the ‘OK’ icon Positive and Negative Numbers Positive and Negative Numbers Ask yourself “Does this financial transaction allow me to put money IN my pocket or require me to take money OUT of my pocket? IN your pocket = type in a POSITIVE Number OUT of your pocket = type in a NEGATIVE Number If you take \$100,000 and put it in an investment where did the \$100,000 come from? OUT of your pocket = ­100,000 After 2 years the investment gives you \$116,640 IN your pocket Positive and Negative Numbers Positive and Negative Numbers Future Value of a Stream of Payments Future Value of a Stream of Payments Future Value Computation Beginning of Year End of Year Investment \$100,000 x 1 = \$100,000 Income \$100,000 x .08 = 8,000 _______ \$108,000 Investment = \$208,000 + \$100,000 Income \$208,000 x .08 = 16,640 _______ \$224,640 Future Value of a Steam of Payments EXCEL EXCEL Click on function icon (fx) Type ‘fv’ (future value) Click on ‘OK’ Future Value of a Stream of Payments EXCEL EXCEL The ‘Function Arguments’ Box Appears Type ‘.08’ Type ‘2’ Type ‘­100,000’ Type ‘0’ Type ‘1’ Then click ‘OK’ Future Value of a Stream of Payments EXCEL EXCEL Type Type is a value representing the timing of the payment: Payment at the beginning of the period = 1 Investment Contribution First Pension Check Payment at the end of the period = 0 or omitted Debt Payment Compounding Compounding What if your money compounds monthly or payments are made monthly instead of annually? 12 percent interest annually = .12 monthly = .12/12 quarterl = .12/4 y payments annually = 1 monthly = 1 * 12 quarterl = 1 * 4 y PRESENT VALUE PRESENT VALUE Present Value Computation Beginning of Year End of Year Investment \$100,000 / 1.08 = \$92,593 Investment \$92,593 / 1.08 = \$85,734 \$92,593 x 1.08 = \$100,000 PRESENT VALUE PRESENT VALUE EXCEL Clickon function icon (fx) Type ‘pv’ (present value) Click on ‘OK’ PRESENT VALUE PRESENT VALUE EXCEL The ‘Function Arguments’ Box Appears Type ‘.08’ Type ‘2’ Type ‘0’ Type ‘100000’ Type ‘0’ Then click ‘OK’ PRESENT VALUE PRESENT VALUE Present Value Computation End of Year Beginning of Year Investment \$100,000 / 1.08 = \$92,593 \$100,00 / Investment 1.08 2 = \$85,734 0 \$100,00 / Investment 1.08 3 = \$79,383 0 PRESENT VALUE PRESENT VALUE Present Value Computation End of Year Beginning of Year Investment \$100,000 / 1.08 = \$92,593 \$100,00 / Investment 1.08 2 = \$85,734 0 \$100,00 / Investment \$79,383 1.08 3 = ________ 0 \$257,710 PRESENT VALUE PRESENT VALUE EXCEL Click on function icon (fx) Type ‘pv’ (present value) Click on ‘OK’ PRESENT VALUE PRESENT VALUE EXCEL The ‘Function Arguments’ Box Appears Type ‘.08’ Type ‘3’ Type ‘100,000’ Type ‘0’ Type ‘0’ Then click ‘OK’ Four Four Practice Problems Future Value of a Lump Sum Future Value of a Lump Sum Future Value of a Stream of Payments Future Value of a Stream of Payments Future Value of a Stream of Payments Future Value of a Stream of Payments Future Value of a Future Lump Sum Future Value of a Future Lump Sum ...
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