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TIME VALUE OF MONEY
Page 1
FUTURE AND PRESENT VALUE FACTORS
Interest rate
10%
Present value
1,000
First of
End of
% of
Year
Year
Initial
Year
Balance Interest Balance Investment
1
1,000
100
1,100
110%
2
1,100
110
1,210
121%
3
1,210
121
1,331
133%
4
1,331
133
1,464
146%
% of Initial Investment ( Future Value Factor ) = ( 1 + Interest Rate ) ^ # of Years
Present Value Factor = 1 / ( 1 + Interest Rate ) ^ # of Years
A
B
C
D
E
F
G
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18
19
TIME VALUE OF MONEY
Page 2
AMORTIZATON TABLE
The following amortization table shows the link between the present value (amount
borrowed), cash flow (payment) and discount rate (interest rate) on a five-year loan.
Interest rate
10%
Payment
1,000
Amount borrowed
3,791
Beginning
Plus
Less
Ending
Year
Balance
Interest
Payment
Balance
1
3,791
379
(1,000)
3,170
2
3,170
317
(1,000)
2,487
3
2,487
249
(1,000)
1,736
4
1,736
174
(1,000)
909
5
909
91
(1,000)
0
A
B
C
D
E
F
G
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TIME VALUE OF MONEY
Page 3
PRESENT VALUE CALCULATION
The following shows how to calculate the present value as the sum of the present values
of the cash flows.
Interest rate
10%
Payment
1,000
Year
0
1
2
3
4
5
Payment
1,000
1,000
1,000
1,000
1,000
Present value factor
100%
91%
83%
75%
68%
62%
PV of payment
909
826
751
683
621
PV of all payments
3,791
A
B
C
D
E
F
G
H
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