The Time Value of Money. Future Value Investment Interest or Yield Yield 10% Investment $1,000 10...
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Transcript of The Time Value of Money. Future Value Investment Interest or Yield Yield 10% Investment $1,000 10...
![Page 1: 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%](https://reader036.fdocuments.net/reader036/viewer/2022070411/56649f2a5503460f94c4394e/html5/thumbnails/1.jpg)
The Time Value
of Money
The Time Value of Money
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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
The Time Value of Money
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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%
The Time Value of Money
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FUTURE VALUE
The Time Value of Money
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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
The Time Value of Money
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The Time Value of Money
Click the ‘Insert Function’ (fx) icon
FUTURE VALUE
EXCEL
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The Time Value of Money
FUTURE VALUE
EXCEL
The ‘Insert Function’ Box Appears
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The Time Value of Money
FUTURE VALUE
EXCEL
The ‘Insert Function’ Box Appears
Type ‘fv’Then click on the ‘Go’ icon
Then click ‘OK’
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The Time Value of Money
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
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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
The Time Value of Money
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The Time Value of Money
Positive and Negative Numbers
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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
The Time Value of Money
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The Time Value of Money
EXCEL Click on function icon (fx)
Type ‘fv’ (future value)
Click on ‘OK’
Future Value of a Steam of Payments
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The Time Value of Money
EXCELThe ‘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
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The Time Value of Money
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
Future Value of a Stream of Payments
First Pension Check
Type
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The Time Value of Money
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
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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
The Time Value of Money
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The Time Value of Money
EXCEL Click on function icon (fx)
Type ‘pv’ (present value)
Click on ‘OK’
PRESENT VALUE
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The Time Value of Money
EXCELThe ‘Function Arguments’ Box Appears
Type ‘.08’Type ‘2’
Type ‘0’Type ‘100000’Type ‘0’
Then click ‘OK’
PRESENT VALUE
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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
The Time Value of Money
Present Value of a Stream of Payments
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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
________
The Time Value of Money
Present Value of a Stream of Payments
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The Time Value of Money
EXCEL Click on function icon (fx)
Type ‘pv’ (present value)
Click on ‘OK’
Present Value of a Stream of Payments
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The Time Value of Money
EXCELThe ‘Function Arguments’ Box Appears
Type ‘.08’Type ‘3’
Type ‘100,000’Type ‘0’Type ‘0’
Then click ‘OK’
Present Value of a Stream of Payments
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FourPractic
e Proble
ms
The Time Value of Money
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The Time Value of Money
Future Value of a Lump Sum
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The Time Value of Money
Future Value of a Stream of Payments
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The Time Value of Money
Future Value of a Stream of Payments
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The Time Value of Money
Future Value of a Future Lump Sum