You are on page 1of 8

# TIME VALUE OF MONEY

Present Value
 Present value of a lump sum
 1 
PV = FV * PVIFk ,T  FV *  T 

 (1 + k ) 

Example 1: Find the present value of a \$100 cash flow that is to be received 5 years from now if
the interest rate equals 10%.
Present Value Future Value PVIF(10%,5)
\$62.09 \$100 0.620921
PV = 100 * PVIF10%,5 = 62.09
Calculator Inputs
n=5 i = 10% PV = ? PMT = 0 FV = 100

 Present value of an annuity
Note: An annuity is a stream of equal cash flows that occur at equal intervals such as monthly or
annually.
 T
1 
PV = PMT * PVIFAk ,T  PMT *   
t
 t=1 (1 + k ) 
 1 
 1 T 
 1  k   1 1 
  
 PMT *    PMT *  T

k
  k k 1  k  
 
Example 2: Find the present value of a \$100 annuity that is to be received annually over the next 5
years if the interest rate equals 10%.
Present Value Annuity PVIFA(10%,5)
\$379.08 \$100 3.790787
PV = 100 PVIFA10%,5 = 379.08
Calculator Inputs
n=5 i = 10% PV = ? PMT = 100 FV = 0

Example 3: Find the present value of a \$100 annuity that is to be received quarterly over the next
5 years if the interest rate equals 10%.
Present Value Annuity PVIFA(2.5%,20)
1,558.92 \$100 15.589162
PV = 100 PVIFA2.5%,20 = 1,558.92
Calculator Inputs
n = 20 i = 2.5% PV = ? PMT = 100 FV = 0
Note: The discount rate must match the annuity period (i.e., for a quarterly annuity use a quarterly
rate, knom/4.
Note: For an annuity due (i.e., for beginning of the year payments), multiply the present value by
(1+interest rate per period). The present values equal \$416.99 and \$1,597.89 for examples 2 and

.3 respectively.

5% PV = ? PMT = 0 FV = 100 Continuous k T PV T = FV * e nom Example 6: Find the present value of a \$100 cash flow that is to be received 5 years from now if the interest rate equals 10% compounded continuously using the effective annual rate to take the compounding effect into consideration.381289 2.T) k(nom)/4 T*m Compounding \$61.T *m = T *m  k nom   1   m  Example 5: Find the present value of a \$100 cash flow that is to be received 5 years from now if the interest rate equals 10% compounded quarterly using the rate per period to take the compounding effect into consideration.517092 5 Continuous % Calculator Inputs n=5 i = 10. Present Value Future Value PVIF(k.Compounding Effects: Annual. Present Value Future Value PVIF(k. Quarterly.610271 10.03 \$100 0. Monthly. where m equals the number of periods/year such as 4 for quarterly compounding or k (eff )  e k ( nom )  1 for continuous compounding.Present Value Lump Sum .T) k(eff) T Compounding \$61.381289% PV = ? PMT = 0 FV = 100 Note: To calculate the effective rate use k (eff )  k ( nom) m for discrete compounding. Present Value Future Value PVIF(k. Weekly.381289% PV = ? PMT = 0 FV = 100 FV PV T = FV * PVIF k nom / m .65 \$100 0. Semi-annual.606531 10. T = FV * (1 + k eff ) T Example 4: Find the present value of a \$100 cash flow that is to be received 5 years from now if the interest rate equals 10% compounded quarterly using the effective annual rate to take the compounding effect into consideration.5% 5*4 Quarterly Calculator Inputs n = 20 i = 2. .03 \$100 0. Daily 1 PV T = FV * PVIF k eff .381289 5 Quarterly % Calculator Inputs n=5 i = 10.T) k(eff) T Compounding \$60.

5 = 161.t   t=1   1  k  T  1   PMT *     k  Example 8: Find the future value at time 5 of a \$100 annuity that is to be received annually over the next 5 years if the interest rate equals 10%.05 \$100 1.47 \$100 25.5% PV = 0 PMT = 100 FV = ? Note: The discount rate must match the annuity period (i.5%.T  PMT *   (1 + k ) T .544658 FV = 100 FVIFA2..56 and \$2.47 Calculator Inputs n = 20 i = 2. .05 Calculator Inputs n=5 i = 10% PV = 100 PMT = 0 FV = ?  Future value of an annuity  T  FV = PMT * FVIFAk .5) \$161.51 \$100 6. knom/4. Future Value  Future value of a lump sum FV = PV * FVIFk . multiply the future value by (1+interest rate per period).T  PV * (1 + k ) T Example 7: Find the future value in 5 years of a \$100 cash flow if the interest rate equals 10%.33 for examples 8 and 9 respectively. Future Value Present Value FVIF(10%.20 = 2.20) \$2.5) \$610.554.51 Calculator Inputs n=5 i = 10% PV = 0 PMT = 100 FV = ? Example 9: Find the future value at time 5 of a \$100 annuity that is to be received quarterly over the next 5 years if the interest rate equals 10%.e.5 = 610.e. Note: For an annuity due (i.618.105100 FV = 100 FVIFA10%. Future Value Annuity FVIFA(2. for a quarterly annuity use a quarterly rate. for beginning of the year payments). Future Value Annuity FVIFA(10%. The FVs equal \$671.610510 FV = 100 FVIF10%..5%.554.

T = PV * (1 + k eff ) Example 10.648721 10. Find the future value in 5 years of a \$100 cash flow if the interest rate equals 10% compounded continuously using the effective annual rate to take the compounding effect into consideration. T * m = PV *  1 +   m  Example 11. Monthly. Future Value Present Value FVIF(k.5% PV = 100 PMT = 0 FV = ? Continuous k T FV T = PV * e nom Example 12.517092 5 Continuous % Calculator Inputs n=5 i = 10.Future Value Lump Sum . Daily T FV T = PV * FVIF k eff . Future Value Present Value FVIF(k.86 \$100 1. Find the future value in 5 years of a \$100 cash flow if the interest rate equals 10% compounded quarterly using the rate per period to take the compounding effect into consideration.T) k(eff) T Compounding \$164. Weekly.5% 5*4 Quarterly Calculator Inputs n = 20 i = 2.381289% PV = 100 PMT = 0 FV = ? T* m  k nom  FV T = PV * FVIF k nom / m .381289% PV = 100 PMT = 0 FV = ? .86 \$100 1.381289 5 Quarterly % Calculator Inputs n=5 i = 10.638616 2. Quarterly.87 \$100 1.Compounding Effects: Annual. Find the future value in 5 years of a \$100 cash flow if the interest rate equals 10% compounded quarterly using the effective annual rate to take the compounding effect into consideration.T) k(nom)/4 T*m Compounding \$163. Semi-annual. Future Value Present Value FVIF(k.638616 10.T) k(eff) T Compounding \$163.

554.47 Total interest – Regular interest \$100 annuity due for 20 quarters @ 2.33 Total interest – Regular interest N  N  1 N ( N  1)  N Note: Use n 1 ( n  1)  0  1  2  3    N  1  N for the number 2 2 of periods receiving simple interest for a regular annuity.618.): \$100 annuity for 5 years @ 10%/yr FV of annuity \$610.33 See example 8 Return of principal 2.00 Pmt * n = 100 * 5 Total interest 110.33 FV – return of principal Regular interest 525.00 Pmt * (knom/m) * n(n+1)/2 = 100 * 10% * 15 Interest on interest 21.5%/qtr FV of annuity \$2.00 Pmt * n = 100 * 20 Total interest 618.00 Pmt * (knom/m) * n(n-1)/2 = 100 * 2.51 FV – return of principal Regular interest 100.51 Total interest – Regular interest \$100 annuity due for 5 years @ 10%/yr FV of annuity \$671.00 Pmt * n = 100 * 5 Total interest 171.47 See example 8 Return of principal 2. N  N  1  N Note: Use n 1 n 1 2  3  N  for the number of periods receiving simple 2 interest for an annuity due.5%/qtr FV of annuity \$2.56 Total interest – Regular interest Example 9 (cont.5% * 210 Interest on interest 93.): \$100 annuity for 20 quarters @ 2.00 Pmt * (knom/m) * n(n-1)/2 = 100 * 10% * 10 Interest on interest 10.51 See example 8 Return of principal 500.00 Pmt * (knom/m) * n(n+1)/2 = 100 * 2.56 FV – return of principal Regular interest 150.47 FV – return of principal Regular interest 475.56 See example 8 Return of principal 500.00 Pmt * n = 100 * 20 Total interest 554.000. .5% * 190 Interest on interest 79.000.An analysis of the Future Value Annuity Return Example 8 (cont.

00 Present value Total interest 64.87 FV – return of principal Regular interest 50.): \$100 invested for 5 years @ 10%/yr with quarterly compounding FV \$163.00 PV * (knom) * n = 100 * 10% * 5 Interest on interest 13.): \$100 invested for 5 years @ 10%/yr with quarterly compounding FV \$163.86 FV – return of principal Regular interest 50.): \$100 invested for 5 years @ 10%/yr with continuous compounding FV \$164.86 Total interest – Regular interest Example 11 (cont.00 PV * (knom) * n = 100 * 10% * 5 Interest on interest 14.86 See example 10 Return of principal 100.87 Total interest – Regular interest .An analysis of the Future Value Return of a Lump Sum Example 10 (cont.5% * 20 Interest on interest 13.86 See example 11 Return of principal 100.86 Total interest – Regular interest Example 12 (cont.87 See example 12 Return of principal 100.00 Present value Total interest 63.00 PV * (knom/m) * (m*n) = 100 * 2.86 FV – return of principal Regular interest 50.00 Present value Total interest 63.

03 2 \$2.398.637.362.Loan Amortization Schedule Example: \$10.180. Balance Interest Principal End.97 \$4.97 \$10.000.637.20 \$1. . Balance 1 \$2. 5 year loan at 10%/year Payment equals \$2.e.30 4 \$2.637 .00 \$1.30 \$457. Prin.25 \$656.14 \$2.981.16 \$239.97 (i.362.578.00 \$1.637. Repayment of Year Payment Beg.560.97 \$8.560.637. 5).000.77 \$6.398.398.25 3 \$2.97 \$8.16 \$0.03 \$1.00 Payment ..16 5 \$2.578.801.637.83 \$2. Beg Bal – = End Balancet-1 Beg Bal * k Interest Repay.000.637.82 \$2. 10000 = PMT * PVIFA10%.97 \$6.97 \$2.03 \$836.95 \$4.