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 SelfTest 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 3year 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 21.
Summary of Future Value Calculations
$100.00
5.00%
3
Periods:
0
1
2
3




Cash Flow Time Line:
$100
FV = ?
StepbyStep 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 22 (shown below) shows how a $1 investment grows over time at different interest rates.
The curves
were created by solving for FV at different values for N and I.
This allows you to simultaneously see the
effects of varying time and the interest rate.
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 Spring '10
 fi515
 Time Value Of Money, Net Present Value

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