Time Value of Money Excel Financial Functions Future Value FV(rate,nper,pmt,PV,Type) Present value PV(rate,nper,pmt,FV,type) Annuity payment/receipt PMT(rate,nper,PV,FV,type)

IRR (yield) of an annuity Rate(nper,pmt,PV,FV,type,guess) Present value of uneven cash flows NPV(rate,value 1, value 2,) Net present value of uneven cash flows NPV(rate,value 1, value 2,) + value 0 IRR (yield) of uneven cash flows IRR(values)

Excel has several built-in functions for soving the time value of money problems. The following examples illustrates this. Notice that each example, has multiple problems (numbered as 1, 2 We have given solution for one problem; you solve others. CONCEPTS OF TIME VALUE OF MONEY Future Value of a Single Cash Flow Ex. 1 Today you deposit Rs 10,000 in a 5 year fixed deposit with the State Bank of India. You shall earn compond interest rate of 6 per annum on your deposit. How much amount will you receive after 5 years? Present value (Rs) Years Interest rate Future value (Rs) FV(rate,nper,pmt,-PV,0) Present Value of a Single Cash Flow Ex. You expect to receive Rs 50,000 after 5 years as a 2 bonus from your employer. The interest rate is 6 percent. How much is Rs 50,000 worth today? Future amount (Rs) Period Interest rate Present amount (Rs) =PV(rate,nper,pmt,-FV,0) Present Value of an Annuity Ex. You will receive Rs 10,000 each year for 5 years. The 3 interest rate is 9 percent. How much is the worth of your receipts today? Annual amount (Rs) Number of payments Interest rate Present value (Rs) =PV(Rate,Nper,Pmt,-FV,0) Future Value of an Annuity Ex. You deposit Rs 10,000 each year for 10 years in a 4 bank. The interest rate is 10 percent. How much is the worth of your deposits today? Annual amount (Rs) Number of payments Interest rate Present value (Rs) =FV(Rate,Nper,PMT,-PV,0) Annuity Payment for a Future Value 10,000 10 10% 159,374 10,000 15 10% 10,000 10 9% 64,177 10,000 15 9% 50,000 10 6.00% 27,920 50,000 15 6.00% 50,000 10 5% 628,895 50,000 15 5%

Ex. You wish to receive Rs 10,000 at the end of 10 years 5 from your fixed deposit in a bank. The interest rate is 10 percent. How much payment should you make each year in your fixed deposit account to accumulate Rs 10,000 after five years? Future value (Rs) Number of periods Interest rate Present value Annual payment (Rs) =PMT(Rate,NPer,PV,FV,Type) Interest Rate in an Annuity Ex. You are thinking of investing Rs 10,000 today in a fund 6 that promises you Rs 1,600 each year for 10 years. How much is your annual return (interest) from this investment? Present value (Rs) Future value Annual amount (Rs) Number of years Interest rate =RATE(NPer,PMT, PV,FV,Type,guess) Number of Periods in an Annuity Ex. You have a choice with regard payments. Either you can 7 pay Rs 10,000 in the future or pay an annuity of Rs 627. If the discount rate is 10%, how long will you pay the annuity? Present value (Rs) Future value (Rs) Annual amount (Rs) Interest rate Number of periods =Nper(Rate,Pmt,0,-FV,0) Annuity Due (Deferred Annuity) Ex. You will receive an annuity of Rs 10,000 in the 8 beginning of the year. The discount rate is 9%. What is the present value of the annuity? Annual amount (rs) Number of payments Interest rate Present value =PV(Rate,Nper,Pmt,-FV,1) Present Value of Uneven cash flows 10000 10 9% 10000 15 9% 0 -10,000 627 10.00% 10.00 0 -10,000 1,800 15% 10,000 0 1,800 10 12.41% 10,000 0 1,800 15 10,000 10 10% 0 627 10,000 15 10% 0

Ex. In this example, we show the calculation of NPV when 8 the cash flows are uneven. Interest rate Year Cash flows Present value =NPV(rate,value1,)+value 0 Internal rate of return (yield) of Uneven Cash Flows Ex. In this example, we show the calculation of IRR when 9 the cash flows are uneven. 12% 0 -10,000 549 1 5,000

Interest rate Year Cash flows Present value IRR

12% 0 -10,000 549 15.00%

1 5,000

=IRR(values) Multiperiod compounding Ex. This example shows the calculation of the effective 10 interest rate under multiperiod compounding.

Investment (Rs) Simple interest rate Compounding/year Years Future value (Rs) Efective interest rate

1,000 1,000 12% 12% 1 2 1 1 1,120.00 1,123.60 12.00% 12.36%

ng examples illustrates this. on for one problem; you solve

Excel has several built-in functions for soving the time value of money problems. The following examples illustrates

50,000 5 5%

50,000 10 10%

50,000 15 4%

50,000 5 6.00%

50,000 10 10%

50,000 15 4%

10,000 5 9%

10,000 10 12%

10,000 15 6%

10,000 5 10%

10,000 10 12%

10,000 15 6%

10,000 5 10% 0

10,000 10 12% 0

10,000 15 6% 0

10,000 0 1,800 5

10,000 0 1,500 10

10,000 0 2,000 15

0 -10,000 3,600 5%

0 -10,000 1,500 10%

0 -10,000 2,000 15%

10000 5 9%

10000 10 12%

10000 15 6%

(Rs 000) 2 4,000 3 2,000 4 1,500 5 915

(Rs 000) 2 4,000 3 2,000 4 1,500 5 915

1,000 1,000 1,000 1,000 12% 12% 12% 12% 4 12 52 365 1 1 1 1 1,125.51 1,126.83 1,127.34 1,127.47 12.55% 12.68% 12.73% 12.75%

wing examples illustrates this.