Day 7 The Time Value of Money

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THE TIME VALUE OF MONEY
BACK TO THE FUTURE
Future Value
Investment Interest or Yield
Investment
10
___
x
$1,000
100
10%
10% = .1
50% = .5
=
1
10
___
Yield
=
.1
8% = .08 6.5% =
=
$100 Annual Yield
.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
Future Value Computation
Beginning of Year
Investment
Income
End of Year
1 = 100%
$1,000 x 1 = $1,000
$1,000 x .08 = _____
80
$1,080
$1,000 x 1.08 = $1,080
$1,080 x 1.08 = $1,166
Investment x (1 + Interest Rate)
Present Value x (1 + int)
PV x (1 + int)
2
= Future Value
= Future Value End of year 1
= Future Value End of year 2
PV x (1 + int) n = Future Value
Number of Payment Periods
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
$100,000 x 1.08 = $108,000
$108,000 x 1.08 = $116,640
In your browser Type in www.openoffice.org
Click on the “I want to download OpenOffice.org” button
OpenOffice.org calc
Click on the “Download now!” button
Save the file to your Desktop
Go to your desktop and double
click the OpenOffice.org Icon to
install it.
OpenOffice.org calc
OpenOffice.org calc
Click the ‘Insert Function’ (fx) icon
FUTURE VALUE
OpenOffice.org calc
The ‘Function Wizard’ Box Appears
FUTURE VALUE
OpenOffice.org calc
The ‘Function Wizard’ Box Appears
Highlight
‘FV’
FUTURE VALUE
Double click on ‘FV’
OpenOffice.org calc
The ‘function’ formula Open Office utilizes appears as you type
Type ‘.08’
Type ‘2’
Type ‘0’
Type ‘-100000’
FUTURE VALUE
The calculated answer appears here
even before you click the ‘OK’ icon
The ‘Function Arguments’Then
Boxes Appears
click ‘OK’
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
Future Value of a Steam 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
OpenOffice.org calc
Future Value of a Steam of Payments
Click on function icon (fx)
Type ‘fv’ (future value)
Click on ‘Next’
OpenOffice.org calc
Future Value of a Steam of Payments
The Future Value ‘Function Wizard’ Box Appears
Type ‘.08’
Type ‘2’
Type ‘-100,000’
Type ‘0’
Scroll Down
OpenOffice.org calc
Future Value of a Steam of Payments
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
OpenOffice.org calc
Future Value of a Steam of Payments
See the Answer
Type ‘1’
Then click ‘OK’
Compounding
What if your money compounds monthly or
payments are made monthly instead of annually?
12 percent interest
annually = .12
monthly = .12/12
quarterly = .12/4
payments
annually = 1
monthly = 1 * 12
quarterly = 1 * 4
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
OpenOffice.org calc
PRESENT VALUE
Click on function icon (fx)
Type ‘pv’ (present value)
Click on ‘Next’
OpenOffice.org calc
PRESENT VALUE
The ‘Function Wizard’ Box Appears
Type ‘.08’
Type ‘2’
Type ‘0’
Type ‘100000’
Then click ‘OK’
Present Value of a Stream of Payments
Present Value Computation
End of Year
Beginning of Year
Investment $100,000 / 1.08 = $92,593
Investment $100,000 / 1.08 2 = $85,734
Investment $100,000 / 1.08 3 = $79,383
Present Value of a Stream of Payments
Present Value Computation
End of Year
Beginning of Year
Investment $100,000 / 1.08 = $92,593
Investment $100,000 / 1.08 2 = $85,734
Investment $100,000 / 1.08 3 = ________
$79,383
$257,710
OpenOffice.org calc
Present Value of a Stream of Payments
Click on function icon (fx)
Type ‘pv’ (present value)
Click on ‘OK’
OpenOffice.org calc
PRESENT VALUE
The ‘Function Wizard’ Box Appears
Type ‘.08’
Type ‘3’
Type ‘100,000’
Type ‘0’
Scroll Down
OpenOffice.org calc
PRESENT VALUE
Verify Answer
Type ‘0’
Then click ‘OK’
Four
Practice
Problems
Future Value of a Lump Sum
OpenOffice.org calc
Future Value of a Stream of Payments
OpenOffice.org calc
Present Value of a Stream of Payments
OpenOffice.org calc
Present Value of a Future Lump Sum
OpenOffice.org calc