TIME VALUE OF MONEY EXAMPLES

For each question you need to figure out what you know and what you need to find out. The variables are the time period, the rate, whether it is a lump sum or a stream of payments and whether you want to find out what the a If you have a stream of payments it is an annuity, otherwise it is a lump sum. Any time it says "per year" or "per month" we are talking about an annuity. In that case we will always have a PMT in Excel. If you have a lump sum you have to enter either a PV or an FV into Excel. Not both. If you have a lump sum you must also put a '0' in the PMT spot in Excel or you will get the wrong answer. You also have to remember that excel looks at these as inflows and outflows, so if your PV is positive your FV will come out negative. Future value of a lump sum: in these examples we know an amount today, a time period and a rate. We are not given a per year or other i =FV(rate,nper, pmt, [pv],[type]). The [] means this is optional - if you don't have the value you can just skip entering it. Type is whether it We must enter a 0 for PMT Future Value. What is the future value of periods rate a. $600 invested for 12 years at 12 percent compounded annually? 12 12% b. $2500 invested for 18 years at 4.56 percent compounded annually? 18 5%

Now we know an amount we will have in the future. How much do I need to deposit today to get that amount in the future. Note that we still enter a 0 for the PMT =PV(rate,nper, pmt, [fv],[type]). The [] means this is optional - if you don't have the value you can just skip entering it. Note that I put a '-' in front of the formula to ensure a positive answer Present Value. What is the present value of periods rate a. $2700 to be received 10 years from now at a 11 percent discount rate? 10 11% b. $20000 to be received 12 years from now at a 8 percent discount rate? 12 8%

When we switch to a stream of payments, such as as amount per year, we will have a PMT value. We might have a lump sum as well. In this example we don't have a lump sum, we just have a stream of payments. It is important to put the PMT as a negative if you want a positive answer for the FV Future Value of an Annuity. What is the future value of periods rate a. $1200 a year for 18 years at 7 percent compounded annually? 18 7%

In our next case we have a future series of payments and want to know a present value. This would be like asking what lump sum today eq We have a PMT but no PV amount 4. Present Value of an Annuity. What is the present value of periods rate a. $450 a year for 15 years at a 7.5 percent discount rate? 15 8%

Often you want to know how long it will take to earn a certain amount of money. You might have a payment amount or might now. Here we have just the starting and ending amounts, and need to know how long it will take. We use NPER. Remember that your cash flows for PV and FV are opposites =NPER(rate, pmt, PV, FV, type) How many years will it take to grow periods rate a. $1000 to a value of $6000 at a compound rate of 12 percent ? 12% What if we have a payment stream? Annuity. How many years will it take for a payment of a. $687 to grow to 9,090.91 at a compound rate of 14 percent ?

periods

rate 14%

We can also use Excel to solve for an interest rate. =RATE 6. Interest Rate. At what interest rate will it take to grow periods rate b. $625 to a value of $2750 over 10 years? 10 8. Annuity. At what interest rate will a payment of periods rate a. $500 grow to $4500 over a period of 9 years? 9 Why did I get a zero value? Because if I set aside 500 per year for 9 years I end up with 500*9 or 4500. So I have no interest at all. What if instead I want to know what rate it will take to have a. $500 grow to $5400 over a period of 9 years? 9

Many times we use these calculations for common purchases such as a car or a mortgage. In those cases we have some standard assumptions. Payments are generally monthly. Car loans are often for 5 years, or 60 months. Since we are dealing with monthly amounts we must multiply the years by 12 AND divide th For mortgages you might have a 30 year term. Again you multiply the years by 12 AND divide the rate by 12. Just as in earlier examples, however, you use the equations the same way. Don't forget to keep the inflows and outflows separated 9.How much is a car loan with a payment of a. $344 per month for 5 years at 6 interest per year? 10. Car Loans. (Hint: P/Y=12) How many months will you pay on a car loan of a. $14108 with a payment of 335.63 per month at 15 interest per year? 11. Car Loans. (Hint: P/Y=12) What is the interest rate on a loan of a. $8000 with a payment of 191.57 per month for' 4 years? 12. Mortgages.(Hint: P/Y=12, House=Loan Amount/ (1 Down Payment %) ) What is the house cost on a 10 percent down mortgage with payments of a. $3,594.47 per month for 30 years at 4 percent interest? 13. Mortgages. (Hint: P/Y=12) What is the interest rate on a mortgage of a. $475980 with a payment of $2100 per month for 30 years? periods 5 periods rate 15% periods 4 periods 30 periods 30 rate rate 4% rate rate 6%

whether you want to find out what the amount is worth now or some time in the future.

ways have a PMT in Excel.

e your FV will come out negative. e. We are not given a per year or other indicator. We are therefore looking for a FV. just skip entering it. Type is whether it is an annuity due or not, which doesn't apply here PMT $ $ FV unknown unknown PV $ $ FV 600 =FV(.12,12,0,600) 449 $2,337.59 $1,001.91

hat amount in the future.

just skip entering it. PMT $ $ FV $ $ PV 2,700 unknown 20,000 unknown PV =-PV(.11,10,0,2700) $950.90 $7,942.28

We might have a lump sum as well.

PMT FV $ 1,200 unknown

PV $

=FV(.07,18,-1200,0)

FV of annuity $40,798.84

d be like asking what lump sum today equals the same thing as a stream of future payments. PMT $ FV 450 PV $ ANSWER =-PV(.08,15,450,0) $3,972.20

a payment amount or might now.

PMT $

FV $

PV 6,000 $

ANSWER 1,000 =NPER(C47,D47,F47,-E47) 15.81

PMT $

FV 687 $

PV 9,091 $

ANSWER =NPER(C51,-D51,-F51,E51) 8.00

PMT $ PMT $

FV $ FV 500 $ -

PV 2,750 $ PV 4,500 $

ANSWER 625 =RATE(B58,-D58,-F58,E58,,0.1) ANSWER 0.0% 15.97%

500 $

5,400 $

4.5%

multiply the years by 12 AND divide the rate by 12.

PMT $ PMT $ PMT $ PMT $

FV 344 $ FV 336 $ FV 192 $ FV 3,594 $

PV PV $ PV $ PV PV $ =PV(rate/12,nper*12,-pmt,fv)

ANSWER $17,793.59 ANSWER IN MONTHS YEARS 60.00 5.00 ANSWER IN MONTHS YEARS 0.58% 7.00% LOAN $752,902 COST $836,558

14,108 NPER RATE 8,000

PMT FV $ 2,100 $

475,980 RATE

ANSWER IN MONTHS YEARS 0.28% 3.36%