Year 0 1 2 3 4

Payment

Interest

Borrow amount
Year 0 1 2 3 4
Payment $ 5,000.00 $ 8,000.00 $ 8,000.00 $ 8,000.00
Method 1 4716.981132 7119.97152 6716.95426 6336.74931 24890.66
Interest 6%
Method 2
Borrow amount $24,890.66

Year 0 1 2 3 4
Payment $ 5,000.00 $ 8,000.00 $ 8,000.00 $ 8,000.00
Total
FV in Yr 4 5955.08 8988.8 8480 $ 8,000.00 31423.88
Year 0 1 2 3 4

Amounts being paid back

Interest Annual

Amount You Can Borrow

5 6
Year 0 1 2 3 4 5

Amounts being paid back $ - $ 70.00 $ 85.00 $ 85.00 $ 90.00 $ 90.00

Method 1 $ 69.65 $ 84.16 $ 83.74 $ 88.22 $ 87.78
Interest Annual 0.5%
Interest Monthly 0.04%
Amount You Can Borrow $ 500.90
(Present Value)
Solve for FV:
N 6
i 0.5%
PV $ 500.90
pmt 0
FV $516.11
 6

$ 90.00
$ 87.35 $ 500.90
Pmt Payments $ 1,000.00
i Interest rate 10%
N Number of Years 3

PV Present Value ($2,735.54)

FV Future Value ($3,641.00)

Payments 1000
Interest rate 0.1
Number of Years 3

Present Value ($2,735.54)

Future Value ($3,641.00)

Payments
Interest rate
Number of Years

Present Value

Future Value
Payments 1000
Interest rate 0.06
Number of Years 3

Method #1
Present Value ($2,833.39)

Future Value ($3,374.62)

Method #2
PV ($2,833.39) * (1+.06)^3
FV -3374.616

N 3
i 0.06
PV ($2,833.39)
Pmt 0
FV $3,374.62
How to Solve a Perpetuity

C (pmt) = amount needed

r = interest rate

PV
How to Solve a Perpetuity

C (Pmt) = amount ne $ 30,000.00

r = interest rate 8%

PV $ 375,000.00
PV

r = interest rate

Solve for C (Pmt)

C (Pmt) = amount needed
PV $ 4,000,000.00

r = interest rate 5%

Solve for C (Pmt)

C (Pmt) = amount needed $ 200,000.00
Year Payments
0 Interest Rate 0.08
1
2 A) Present Value of
3 Payments
4
5
6 B) Lump Sum Today
7
8
9
10
11 Which option should you choose?
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
PV of cash flows
$ 15,000,000
Year Payments

0 1000000

1 1000000 Interest Rate 0.08

2 1000000
3 1000000

A) Present Value of
4 1000000 Payments ($12,158,406.01)
5 1000000
6 1000000
7 1000000 B) Lump Sum Today $ 15,000,000.00
8 1000000
9 1000000 Which option should you choose?
10 1000000
11 1000000 B
12 1000000
13 1000000

14 1000000
15 1000000
16 1000000
17 1000000
18 1000000
19 1000000
20 1000000
21 1000000
22 1000000
23 1000000
24 1000000
 25 1000000
26 1000000
27 1000000
28 1000000
29 1000000
30

PV of cash flows
$12,158,406.01
PV of cash payments Payments 10000
$ 57,665.00 Interest rate 7.0%
Number of Years 7
PV of BMW
$ 61,000.00 Present Value ($57,665.40)

Choose BMW Future Value-Pmts ($92,598.03)

Future Value-BMW ($97,952.67)

N
i
PMT
PV
FV
N 30
i 0.1
PMT 0
PV -10000
FV $1,644,940.23
At Age 45:
N
i
PMT
PV
FV

At Age 65:
N
i
PMT
PV
FV
At Age 45:
N 20
i 0.1
PMT -10000
PV 0
FV $572,749.99

At Age 65:
N 20
i 0.1
PMT 0
PV -572750
FV $3,853,175.60
Formula PV = C/(r-g)

C
r
g

PV
Formula PV = C/(r-g)

C $ 30,000.00
r 8%
g 4%

PV $ 750,000.00
Original Problem 4-3a answer

PV

r = interest rate 5%

Solve for C (Pmt)

C (Pmt) = amount needed $ -

Adjustment due to Inflation (2% increase in salary annually)

Rate of
Salary
Increase

C (Pmt) = PV * (r - g)

C
Original Problem 4-3a answer

PV $ 4,000,000.00

r = interest rate 5%

Solve for C (Pmt)

C (Pmt) = amount needed $ 200,000.00

Adjustment due to Inflation (2% increase in salary annually)

Rate of
Salary
Increase 2%

C (Pmt) = PV * (r - g)

C $ 120,000.00
Year Amount Find PV of Cashflows
1
2 Interest Rate ®
3
4 Growth Rate (g)
5
6 PV of Cash flows
7
8 FV of PV
9
10 N
11 i
12 PMT
13 PV
14 FV
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
 Find PV of Cashflows

Interest Rate ® 10%

Year Amount
1 10000 Growth Rate (g) 5%
2 10500
3 11025 PV of Cash flows $ 150,463.15
4 11576.25
5 12155.063 FV of PV
6 12762.816
7 13400.956 N 30
8 14071 i 0.1
9 14774.554 PMT 0
10 15513.282 PV $ (150,463.15)
11 16288.946 FV $2,625,491.98
12 17103.394
13 17958.563
14 18856.491
15 19799.316
16 20789.282
17 21828.746
18 22920.183
19 24066.192
20 25269.502
21 26532.977
22 27859.626
23 29252.607
24 30715.238
25 32251
26 33863.549
27 35556.727
28 37334.563
29 39201.291
30
Find PV of Cashflows

Interest Rate ®

Growth Rate (g)

Intital Payment

PV of Cash flows

FV of PV

N
i
PMT
PV
FV
Find PV of Cashflows

Interest Rate ® 10%

Growth Rate (g) 4%

Intital Payment $ 10,000.00

PV of Cash flows $ 112,383.92

FV of PV

N 40
i 0.1
PMT 0
PV $ (112,383.92)
FV $5,086,412.46
Solve for Pmt

N
i
PMT
PV
FV
Solve for Pmt

N 30
i 8%
PMT $7,106.19
PV $ (80,000.00)
FV $0.00
Solve for Loan Amount
Down Payment
% of Purchase Price
or Value

Value
less: Down Payment
Loan Amount (PV)

Solve for Pmt (monthly)

N
i
PMT
PV
FV
Solve for Loan Amount
Down Payment $ 50,000

% of Purchase Price or Value 20%

Value $ 250,000
less: Down Payment $ (50,000)
Loan Amount (PV) $ 200,000

Solve for Pmt (monthly)

N 360
i 1%
PMT $1,199.10
PV $ (200,000.00)
FV $0.00