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Time Value of Money Calculations Guide

The document provides definitions and examples for time value of money calculations. It defines key terms like present value, future value, interest rates, and payments. It then works through 7 examples of calculations including: 1) calculating future value given present value and interest rate, 2) discounting future value to present value, 3) calculating annual payment from present value, 4) converting annual payment to monthly payment, 5) calculating maximum purchase price to earn a rate of return, 6) calculating annual rent to earn a rate of return on investment, and 7) calculating annual growth rate from initial and final values. The examples demonstrate how to set up the calculations, identify the appropriate formula, and calculate the results.

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98 views4 pages

Time Value of Money Calculations Guide

The document provides definitions and examples for time value of money calculations. It defines key terms like present value, future value, interest rates, and payments. It then works through 7 examples of calculations including: 1) calculating future value given present value and interest rate, 2) discounting future value to present value, 3) calculating annual payment from present value, 4) converting annual payment to monthly payment, 5) calculating maximum purchase price to earn a rate of return, 6) calculating annual rent to earn a rate of return on investment, and 7) calculating annual growth rate from initial and final values. The examples demonstrate how to set up the calculations, identify the appropriate formula, and calculate the results.

Uploaded by

Huu Duy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

TIME VALUE WORKSHEET

Define: Time The end of a year or period


MARR Minimum Attractive Rate of Return
Interest %I Rate lender charges to use their money
Discount Rate Is an interest rate, but used to discount FV to PV
Opportunity Cost The cost to use your own money
PV Present Value
FV Future Value
AV Annual Value
PMT Payment, monthly
MV Monthly Value, same as PMT

1. You have $30,000 to buy some cows. If you hold off for 5 years, how much will you
have then at 6% interest?

Time Line:

Convert: PV to FV

Use Table: PV to FV Annual

Calculation: $30,000 x 1.3382 = $40,146

2. The book value of a tractor is $35,000 at the end of year 7. At 8% MARR, this would
compensate for how much of its price?

Time Line:

Convert: FV to PV

Use Table: FV to PV Annual

Calculation: $35,000 x 0.5835 = $20,422


3. You need to borrow $50,000 for new milking equipment. If you borrow at 9% interest
for 4 years, what is the annual payment?

Time Line:

Convert: PV to AV

Use Table: PV to AV Annually

Calculation: $50,000 x 0.3087 = $15,435

4. Calculate the monthly payment from above.

Time Line:

Convert: PV to PMT

Use Table: PV to PMT Monthly

Calculation: $50,000 x 0.02489 = $1,244

5. A cow will net $400/yr plus $500 salvage at the end of three (3) years. What is the
most you can pay for her and earn 12% on the investment each year?

Time Line:

Convert: AV to PV ($400/yr)
FV PV ($500 salvage)

Use Table: AV to PV Annually & FV to PV Annual

Calculation: $400 x 2.4018 = $960.72


$500 x 0.7118 = $355.90
Sum $1,316.62
6. You own farm facilities worth $250,000 that you wish to rent. After 7 years they will
be worth $200,000, but you will spend $3,000 for roofs in 3 years. What should be
the annual rent to earn 10% on your investment?

Time Line:

Convert: PV to PV $250,000
FV to PV $200,000
FV to PV $3,000

Use Table: FV to PV Annual &

Calculation: $200,500 x 1 = $250,000


$200,000 x 0.5132 = $102,640
$3,000 x 0.7513 = $2,254
Sum $149,613.90

Convert: PV to AV

Use Table: PV to AV Annually

Calculation: $149,614 x 0.2054 = $30,730.70


7. From 1975 to 2000 per capita consumption of cheese, has increased from 14.3 to
29.8 pounds. Calculate the annual rate of increase.

Time Line:

Known PV FV N

To be determined %I

FV/PV = 2.0839
<5%
Actually 3%

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