1.

Time Value of Money

Part B – Time value of Money

Applications
Time Value of Money
Applications
1. Housing loans
2. Prompt payment discounts from suppliers
3. Car Leasing
4. Consumer loans
5. Loan comparisons
6. Investment in Stamps
7. Purchase of Equipments
1. Housing Loans

•(Based on a real case) A Bank provided in its website (as of January, 2009) the
following simulation:
•Loan value: 250,000 €
•Nominal Interest Rate (APR): 3,893% (Euribor 2,693%+spread of 0,6%)
•Maturity: 244 months
•Monthly payment: 1,484.64 €

•Please confirm the monthly payment. What can you do to reduce the level of
monthly payments to just 1,000 € ?

3
Housing Loans

PV 250.000,00 €
n 244
APR 3,893%
FV 0,00 €
R 1.484,64 €
if
n 514,44 €
then
R 1.000,00 €

4
Housing Loans

(Real case) In October 2000, a consumer asked a bank to provide a loan simulation
to buy a house under the following conditions:

Value of loan: 89,783.62 €

House Value attributed by Bank: 184,555.22 €
Interest Rate (APR): Euribor 3 months + 0.6% (rounded to nearest 0,25%)
Euribor (Set. 2000): 4.835%
Contractual interest rate (1st payment): 5.50%
Maturity: 25 year (300 months) (1st payment in 30.11.00)

5
Housing Loans

The bank provided the following simulation:

•Monthly payment: ?
5.50% −300
1 − (1 + )
89,783.62 = R  12  R = 551.35
5.50%
12
•Assumption: unchanged interest rates during the contract period
•With an increase of 1% in the interest rate, the new payment would be:

6.50% −300
1 − (1 + )
89,783.62 = R  12  R = 606.23 ( + 54.88 euros)
6.50%
12

6
Housing Loans

•Computation of the “All-In” Effective Interest Rate ) (or “All-in” AER) :

•Administrative and House Evaluation Costs charged to customer by bank:

•249.40 euros

•Mortgage provisional registration costs:

•434,20 euros

•Definitive Mortgage Legal Costs:

•329,21 euros

•Stamp duty on Mortgage:

•538,70 euros

•Total Costs: 249.40+434.20+329.21+538.70=1551.51 euros

7
Housing Loans

•Effective Loan:

•89,783.62 € – 1551.51 € = 88,232.11 €

•Computation of “All-In” AER (Annual Equivalent Rate):

•1) computation of all-in Monthly Effective Interest Rate (MEIR) :

1 − (1 + MEIR ) −300
88,232.11 = 551.35   MEIR = 0.473% / month
MEIR
•R2) Annualisation of MEIR to obtain the “All-in” AER (or “All-In” Annual EIR):

AER = (1 + 0.473%)12 −1 = 5.83% / year

8
Housing Loans

•We could compute an even more comprehensive All-In AER by including the
monthly insurance premia of 57.78 euros:

1 − (1 + MEIR  ) −300
88,232.11 = (551.35 + 57.78)   MEIR  = 0.562% / month
MEIR 

AER ' = (1 + 0.562%)12 −1 = 6.95%

9
2. Prompt Payment Discounts from Suppliers

•Suppose a supplier offers the following payment conditions for all its supplies to
our firm:
•100% of the invoice paid in 2 months
•A discount of 2% if the invoice is paid now
•The firm currently can get short-term loans with an Annual All-In cost of 6.25%

•What should the firm do? What is the indifference prompt payment discount that
could be offered by the supplier?

10
Prompt Payment Discounts from Suppliers

•Suppose that an invoice of 100,000 euros was received

•If the firm borrows from the bank 98,000 euros with a Annual All-In EIR of 6.25%, it
will have to pay to the bank after 2 months
•98,000 (1+6.25%)2/12 = 98,995.25 euros (< 100,000 euros)

•Thus, it will save 1,004.75 euros

11
Prompt Payment Discounts from Suppliers

•The advantage of taking up the loan and accepting the prompt payment discount
could have been analysed as follows:

•Suppliers’ two-month implicit effective interest rate (SEIR):

•SEIR= 100/98-1=2.0408%
•Suppliers AER (SAER)= (1+2.0408%)^(12/2)-1=12.8868%

•Decision:
•if Bank’s All-In Annual AER<SAER, accept the discount and get a loan from the
bank
•If the opposite happens, the supplier’s “loan” will be cheaper

12
3. Car Leasing

•(Based on a real case) A bank proposed in its website (November, 2016) the following
conditions for a car leasing operation:
(all the amounts include VAT@23%)

•Price of the vehicle: € 25.000,00

•Maturity: 48 months
•Initial Down Payment: one monthly payment
•Residual value: 2% (€ 5.000,00)
•APR (TAN in Portuguese): 3,681% (average 12 Months-Euribor of -0,069%+3,75% spread)
•Value of remaining 71 constant monthly payments: € 462,65
•Other costs (not included above):
•Fees for studying and setting terms of operation: 230,63 €
•Monthly administrative fee: € 4,61
• “All-In” AER (TAEG in Portuguese): 4.547%

•Question: please confirm the Monthly Payment and the “All-In” AER

13
Car Leasing

• Source: Portuguese bank, Nov. 2016

14
Car Leasing

P=?
1 − (1 + 3.618% /12) −48
25000 = P(1 + 3.681% /12) + 5000(1 + 3.681% /12) −48
(3.681% /12)
 P = 462.65
All − in AER ?
1 − (1 + MEIR) −47
25000 = 230.63 + 462, 65 + (462.65 + 4.61) + (5000 + 4, 61)(1 + MEIR) −48
MEIR
 MEIR = 0.37128%
 AER = (1 + 0,37128%)12 − 1 = 4.5475%

15
4. Consumer Loans

16
Consumer Loans

•A consumer loan company presented the ad shown in the last slide indicating the
amounts that a consumer could borrow and the corresponding monthly payments.
No maturity for the loan was indicated. The ad refers that the All-In AER (TAEG) is
27,97% and the Annual Nominal Interest Rate (TAN) , or APR, is 23.5%.
•Questions:
•1) What is the maturity of the loan?
•2) What is the stamp duty tax over the interest paid in those loans?
•3) Please build the amortization table, with a discrimination between the
stamp duty, interest paid and principal payment

17
Consumer Loans

ANSWERS
1)
Monthly Effective Interest Rate 2,076%
Implicit Maturity (not rounded) 41,84039724
Effective Maturity 42
Years until Maturity 3,5

Confirmation
RECEIVES PAYS
500 18 €
1000 36 €
1500 54 €
2000 72 €
3000 108 €
4500 162 €

2)
Stamp duty over interest?
monthly interest rate 1,958% with stamp duty 2,076%

Stamp duty over interest 6,0%

18
Consumer Loans
3)

Period Principal interest+tax tax interest principal payment Total

1 500,00 € 10,38 € 0,59 € 9,79 € 7,57 € 17,96 €
2 492,43 € 10,23 € 0,58 € 9,64 € 7,73 € 17,96 €
3 484,69 € 10,06 € 0,57 € 9,49 € 7,89 € 17,96 €
4 476,80 € 9,90 € 0,56 € 9,34 € 8,06 € 17,96 €
5 468,75 € 9,73 € 0,55 € 9,18 € 8,22 € 17,96 €
6 460,52 € 9,56 € 0,54 € 9,02 € 8,39 € 17,96 €
7 452,13 € 9,39 € 0,53 € 8,85 € 8,57 € 17,96 €
8 443,56 € 9,21 € 0,52 € 8,69 € 8,75 € 17,96 €
9 434,81 € 9,03 € 0,51 € 8,52 € 8,93 € 17,96 €
10 425,88 € 8,84 € 0,50 € 8,34 € 9,11 € 17,96 €
11 416,77 € 8,65 € 0,49 € 8,16 € 9,30 € 17,96 €
12 407,47 € 8,46 € 0,48 € 7,98 € 9,50 € 17,96 €
13 397,97 € 8,26 € 0,47 € 7,79 € 9,69 € 17,96 €
14 388,28 € 8,06 € 0,46 € 7,60 € 9,89 € 17,96 €
15 378,39 € 7,86 € 0,45 € 7,41 € 10,10 € 17,96 €
16 368,29 € 7,65 € 0,44 € 7,21 € 10,31 € 17,96 €
17 357,98 € 7,43 € 0,42 € 7,01 € 10,52 € 17,96 €
18 347,45 € 7,21 € 0,41 € 6,80 € 10,74 € 17,96 €
19 336,71 € 6,99 € 0,40 € 6,59 € 10,97 € 17,96 €
20 325,75 € 6,76 € 0,38 € 6,38 € 11,19 € 17,96 €
21 314,55 € 6,53 € 0,37 € 6,16 € 11,43 € 17,96 €
22 303,13 € 6,29 € 0,36 € 5,94 € 11,66 € 17,96 €
23 291,46 € 6,05 € 0,34 € 5,71 € 11,90 € 17,96 €
24 279,56 € 5,81 € 0,33 € 5,47 € 12,15 € 17,96 €
25 267,41 € 5,55 € 0,32 € 5,24 € 12,40 € 17,96 €
26 255,00 € 5,30 € 0,30 € 4,99 € 12,66 € 17,96 €
27 242,34 € 5,03 € 0,29 € 4,75 € 12,92 € 17,96 €
28 229,42 € 4,76 € 0,27 € 4,49 € 13,19 € 17,96 €
29 216,22 € 4,49 € 0,26 € 4,23 € 13,47 € 17,96 €
30 202,76 € 4,21 € 0,24 € 3,97 € 13,75 € 17,96 €
31 189,01 € 3,92 € 0,22 € 3,70 € 14,03 € 17,96 €
32 174,98 € 3,63 € 0,21 € 3,43 € 14,32 € 17,96 €
33 160,66 € 3,34 € 0,19 € 3,15 € 14,62 € 17,96 €
34 146,03 € 3,03 € 0,17 € 2,86 € 14,92 € 17,96 €
35 131,11 € 2,72 € 0,15 € 2,57 € 15,23 € 17,96 €
36 115,88 € 2,41 € 0,14 € 2,27 € 15,55 € 17,96 €
37 100,32 € 2,08 € 0,12 € 1,96 € 15,87 € 17,96 €
38 84,45 € 1,75 € 0,10 € 1,65 € 16,20 € 17,96 €
39 68,25 € 1,42 € 0,08 € 1,34 € 16,54 € 17,96 €
40 51,71 € 1,07 € 0,06 € 1,01 € 16,88 € 17,96 €
41 34,83 € 0,72 € 0,04 € 0,68 € 17,23 € 17,96 €
42 17,59 € 0,37 € 0,02 € 0,34 € 17,59 € 17,96 €

19
5. Loan comparisons

•General procedure:

•Compute the All-In AER of all the (comparable) alternatives

•Choose the one with the lowest All-In AER

20
Loan Comparisons

•Example: Supose a firm has the following financing alternatives for an investment
of 120,000 € (before VAT) in Machinery and Equipment:

•Leasing with maturity in 3 years, residual value of 9,600 € and 36 monthly payments,
Nominal APR=6%; first payment 1 month after signing the contract

•Bank loan with maturity in 3 years, initial bank fees of 2,000 €, Nominal APR=5.5%,
Repayment in full at maturity; Stamp duty tax of 4% over interest and initial bank fees

•Supplier offers a 20% discount if paid immediately, otherwise 3 installments of 40,000 €

each at the end of years 1,2 and 3

•Ignore VAT

21
Loan Comparisons

Value of Equipment 120.000 € FV 9.600 € Bank fees 2000

prompt discount of 20% Leasing APR 6,00% Bank APR 5,50%
Net value 96.000 € R 2.676,46 € Stamp duty tax on interest
and fees 4%
(A) (B) (C)=(A)+(B) (D) (E)=(A)+(D) (F) (G)=(A)+(F)
Time Prompt Payment Supplier Credit Net Payments Leasing payments Net Payments Loan Payments Net Payments
0 -96.000,00 € 0,00 € -96.000,00 € 0,00 € -96.000,00 € 2.080,00 € -93.920,00 €
1 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
2 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
3 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
4 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
5 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
6 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
7 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
8 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
9 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
10 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
11 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
12 0,00 € 40.000,00 € 40.000,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
13 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
14 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
15 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
16 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
17 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
18 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
19 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
20 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
21 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
22 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
23 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
24 0,00 € 40.000,00 € 40.000,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
25 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
26 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
27 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
28 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
29 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
30 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
31 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
32 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
33 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
34 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
35 0,00 € 0,00 € 0,00 € 2.676,46 € 2.676,46 € 457,60 € 457,60 €
36 0,00 € 40.000,00 € 40.000,00 € 12.276,46 € 12.276,46 € 96.457,60 € 96.457,60 €
Monthly EIR Monthly EIR Monthly EIR
0,952% 0,500% 0,543%
Annual EIR Annual EIR Annual EIR
12,04% 6,17% 6,72%
22
6. Stamps
"4 times profit. It's better than the stock market."
Bill Gross, PIMCO, talking to the New York Times in 2007 after seeing his collection of early Great Britain
rarities selling for $9.1m at auction, having purchased the stamps for a little less than $2.5m over 7 years
before the auction.

"Known as a hobby for five to 85, stamp collecting has emerged as a genuine challenger for a place in the
sophisticated investor’s portfolio. Portable, easy to store, readily accessible to valuation and trade, stamps have
maintained their investment cachet over the 170-odd years since values were first printed on small pieces of paper
along with the sovereign’s head."
David Nicholson, Sunday Telegraph, 13 March 2011

"Investing in stamps can help you earn handsome returns in the long term. So it might be the right time to park
some funds here before prices go beyond your reach."
Money Today, 2nd May 2011

"Tangible assets have continued to prove their worth as investments throughout 2010 and early 2011, partly due to
the impetus provided by Asian, especially Chinese buyers. This shows through clearly in the markets for art, wine,
stamps and rare coins."
Money Observer June 2011

23
Stamps

•These pretty Portuguese stamps with King Dom Manuel overprinted with “Republic” as the
result of the Republican 5 October, 1910 Revolution were issued in 1910 with a total face
value of 2382.5 reis and were on sale at Ebay on November 2010 for 30.24₤ (about 35.62€)
with free postage. What was the annual return for an investment in these stamps made in
1910 (you can consider exactly 100 years)? (note that 1000 reis were transformed in 1911
into 1 escudo and that 1 euro makes 200.482 escudos since the creation of the euro
currency) (answer:8.33%)

24
7. Purchase of Equipments

Payments to Suppliers A and B for the supply of one equipment.

Which one is more expensive?

Time (nr of months from now)

A B A B
Price 250000 255000
Payment conditions
with order 50% 10% 0 0
after review of design 20% 20% 5 4
after sucessful testing before delivery 20% 30% 11 8
After delivery 10% 40% 12 12

Annual Cost of capital (Wacc)

8,00%

25
Purchase of Equipments

Payments to Suppliers A and B for the supply of one equipment.

Which one is more expensive?

Time (nr of months from now) Amounts PV

A B A B A B A B
Price 250000 255000
Payment conditions
with order 50% 10% 0 0 125000 25500 125000 25500
after review of design 20% 20% 5 4 50000 51000 48422,08 49708,3
after sucessful testing before delivery 20% 30% 11 8 50000 76500 46594,17 72673,98
After delivery 10% 40% 12 12 25000 102000 23148,15 94444,44

Total 243164,4 242326,7

Annual Wacc
8,00%
Monthly wacc
0,643%

26
Purchase of Equipments

Payments to Suppliers A and B for the supply of one equipment.

Which one is more expensive?

Time (nr of months from now) Amounts PV

A B A B A B A B
Price 250000 255000
Payment conditions
with order 50% 10% 0 0 125000 25500 125000 25500
after review of design 20% 20% 5 4 50000 51000 48800,68 50018,99
after sucessful testing before delivery 20% 30% 11 8 50000 76500 47399,41 73585,27
After delivery 10% 40% 12 12 25000 102000 23584,91 96226,42

Total 244785 245330,7

Annual Wacc
6,00%
Monthly wacc
0,487%

27