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Time Value of Money

# Time Value of Money

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04/15/2011

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TIME VALUE OF MONEY
Page 1
FUTURE AND PRESENT VALUE FACTORS
Interest rate10%Present value1,000First ofEnd of% o YearYearInitial YearBalanceInterestBalanceInvestment11,000100 1,100110% 2 1,100 110 1,210121%3 1,210 121 1,331133%4 1,331 133 1,464146%% of Initial Investment ( Future Value Factor ) = ( 1 + Interest Rate ) ^ # of YearsPresent Value Factor = 1 / ( 1 + Interest Rate ) ^ # of Years
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TIME VALUE OF MONEY
Page 2
AMORTIZATON TABLE
The following amortization table shows the link between the present value (amountborrowed), cash flow (payment) and discount rate (interest rate) on a five-year loan.Interest rate10%Payment 1,000Amount borrowed 3,791BeginningPlusLessEnding YearBalanceInterestPaymentBalance13,791379(1,000)3,170 2 3,170317(1,000)2,487 3 2,487249(1,000)1,736 4 1,736174(1,000)909 5 90991(1,000)0
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TIME VALUE OF MONEY
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PRESENT VALUE CALCULATION
The following shows how to calculate the present value as the sum of the present valuesof the cash flows.Interest rate10%Payment 1,000 Year012345Payment 1,000 1,000 1,000 1,000 1,000Present value factor100%91%83%75%68%62%PV of payment 909 826 751 683 621PV of all payments 3,791
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