The Time Value of Money. Future Value Investment Interest or Yield Yield 10% Investment $1,000 10 _x 100 1 _ 10 =.1== $100 Annual Yield 10% = 50%

The Time Value

of Money

The Time Value of Money

Future Value

Investment Interest or YieldYield

10%

Investment

$1,000

10___x 100

1 ___

10= .1= =

$100 Annual Yield

10% =

50% =

8% =

6.5% =

Compound InterestHow often is interest added to

investment principalExamples: annually, monthly, weekly, daily Annually $1,000 @ 12% =

$120 Monthly $1,000 @ 12% =

$126.83$1,000 x .12

/12 = $10

Month 1 $1,010

x .12/12 = $10.10

Month 2

Monthly Interest = $10

-- Interest earning interest

$1,020 x .12

/12 = $10.30

Month 3

.1 .5 .08 .065


Future Value ComputationBeginning of

YearEnd of Year

Investment

x$1,00

0=

$1,000

1

Income x$1,00

0=

.08

80_____$1,080

1.08

x$1,000

=$1,0801.

08x

$1,080

=$1,166

(1 + Interest Rate)

xInvestme

nt=

Future ValueFuture Value

=(1 + int)xPresent Value P

V x(1 + int)

2

End of year 1

= Future Value End of year 2

PV x (1 + int) n = Future Value

Number of Payment Periods

1 =100%


FUTURE VALUE


FUTURE VALUEFuture Value ComputationBeginning of

YearEnd of Year

Investment

x$100,000

=$100,00

01

Income x$100,000

=.08

8,000_______$108,0

001.08

x$100,000

=$108,0001.

08x$108,

000=

$116,640



Click the ‘Insert Function’ (fx) icon

FUTURE VALUE

EXCEL


FUTURE VALUE

EXCEL

The ‘Insert Function’ Box Appears


FUTURE VALUE

EXCEL

The ‘Insert Function’ Box Appears

Type ‘fv’Then click on the ‘Go’ icon

Then click ‘OK’


FUTURE VALUE

EXCELThe ‘Function Arguments’ Box Appears

Type ‘.08’Type ‘2’

Type ‘0’Type ‘-100000’

The ‘function’ formula Excel utilizes appears as you type

Then click ‘OK’The calculated answer appears here even before you click the ‘OK’ icon

Positive and Negative Numbers

IN your pocket = type in a POSITIVE NumberOUT of your pocket = type in a NEGATIVE Number

Ask yourself “Does this financial transaction allow me to put money IN

my pocket or require me to take money OUT of my pocket?

If you take $100,000 and put it in an investment where did the

$100,000 come from?OUT of your pocket

After 2 years the investment gives you

= -100,000

IN your pocket

$116,640



Positive and Negative Numbers

Future Value of a Stream of Payments

Future Value ComputationBeginning of

YearEnd of Year

Investment

x$100,000

=$100,00

01

Income x$100,000

=.08

8,000_______$108,0

00Investm

ent

+ $100,00

0=

$208,000

Income x$208,000

=.08

16,640_______

$224,640



EXCEL Click on function icon (fx)

Type ‘fv’ (future value)

Click on ‘OK’

Future Value of a Steam of Payments




Type ‘-100,000’Type ‘0’Type ‘1’

Then click ‘OK’



EXCEL

Type is a value representing the timing of the payment:

Payment at the beginning of the period = 1

Payment at the end of the period = 0 or omitted

Investment Contribution

Debt Payment


First Pension Check

Type


CompoundingWhat if your money compounds

monthly or payments are made monthly instead of annually?12 percent

interestannually

= .12

monthly

= .12/12

paymentsannual

ly= 1

monthly

= 1 * 12

quarterly

= .12/4

quarterly

= 1 * 4

PRESENT VALUEPresent Value

ComputationBeginning of Year

End of Year

Investment

/$100,000

=$92,5931.08

$92,593 x 1.08 = $100,000

Investment

/$92,593

=$85,7341.08




Type ‘pv’ (present value)

Click on ‘OK’

PRESENT VALUE




Type ‘0’Type ‘100000’Type ‘0’

Then click ‘OK’

PRESENT VALUE

Present Value Computation Beginning of

YearEnd of Year

Investment

/$100,000

=$92,5931.08Investm

ent/$100,

000=$85,7341.0

82

Investment

/$100,000

=$79,3831.08

3


Present Value of a Stream of Payments

Present Value Computation Beginning of

YearEnd of Year

Investment

/$100,000

=$92,5931.08Investm

ent/$100,

000=$85,7341.0

82

Investment

/$100,000

=$79,3831.08

3

$257,710

________





Type ‘pv’ (present value)

Click on ‘OK’





Type ‘100,000’Type ‘0’Type ‘0’

Then click ‘OK’


FourPractic

e Proble

ms



Future Value of a Lump Sum






Future Value of a Future Lump Sum

Documents

The Time Value of Money. Future Value Investment Interest or Yield Yield 10% Investment $1,000 10 ___x 100 1 ___ 10 =.1== $100 Annual Yield 10% = 50%

The Time Value of Money. Future Value Investment Interest or Yield Yield 10% Investment $1,000 10 _x 100 1 _ 10 =.1== $100 Annual Yield 10% = 50%