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You are on page 1of 103

Time Value of

Money

3-1

Fundamentals of Financial Management, 11/e

Created by: Gregory A. Kuhlemeyer, Ph.D.

Carroll College, Waukesha, WI

3-2

Simple Interest

Compound Interest

Amortizing a Loan

Which would you prefer -- $10,000

today or $10,000 in 5 years?

Obviously, $10,000 today.

You already recognize that there is

TIME VALUE TO MONEY!!

3-3

Why TIME?

Why is TIME such an important

element in your decision?

TIME allows you the opportunity to

postpone consumption and earn

INTEREST.

3-4

postulate

compared between alternatives

to find the best result.

3-5

prominent equivalent of any

change of time value of money.

5

Types of Interest

Simple

Interest

amount, or principal borrowed (lent).

Compound

Interest

interest earned, as well as on the

principal borrowed (lent).

3-6

value

Changing in time value of money

gets future and present

nomination

Getting from present value to

future value is called

compounding.

3-7

present value is called

Formula

3-8

SI = P0(i)(n)

SI:

Simple Interest

P0:

i:

n:

Assume

account earning 7% simple interest for

2 years. What is the accumulated

interest at the end of the 2nd year?

SI

3-9

= P0(i)(n)

= $1,000(.07)(2)

= $140

What

deposit?

FV

Future

= P0 + SI

= $1,000 + $140

= $1,140

time of a present amount of money, or a

series of payments, evaluated at a given

interest rate.

3-10

What

previous problem?

The Present Value is simply the

$1,000 you originally deposited.

That is the value today!

Present

3-11

future amount of money, or a series of

payments, evaluated at a given interest

rate.

Power of Time

Figure 5.1 Future Value and Compound Interest Illustrated

interest rate is zero.

12

3-12

FIN3000,

Figure 5.1 Future Value and Compound Interest Illustrated

value.

13

3-13

FIN3000,

interest

Money

market instruments

Treasury

Local

bills (T-bill)

bills

Certificate

of deposit (CD)

Commercial

3-14

Bill

paper (CP)

of exchange

14

Money market

Contracts up to 1 year

No physical place

investors, brokerage firms, companies)

lending and borrowing)

3-15

Creditworthiness

15

3-16

T-bills

term finance balancing cashflow

auction

Negotiable

Certificate of deposit - CD

deposit

16

Commercial paper- CP

Issued

banks to achieve lower

borrowing rates (sometimes

below the banks prime rate)

Very

3-17

most 60days or less)

17

bankersacceptance

Used

purposes

The

the buyer to pay and asks to

sign it

3-18

Could

be sold at a discount

18to

(1 + r) is a future value factor (FVF)

To simplify calculations of FV use table of FVF.

Years

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1,01

1,02

1,03

1,04

1,05

1,06

1,07

1,08

1,09

1,1

1,02

1,04

1,06

1,08

1,10

1,12

1,14

1,17

1,19

1,21

1,03

1,06

1,09

1,12

1,16

1,19

1,23

1,26

1,295

1,33

1,04

1,08

1,13

1,17

1,22

1,26

1,31

1,36

1,41

1,46

1,05

1,1

1,16

1,22

1,28

1,34

1,40

1,47

1,54

1,61

1,06

1,13

1,19

1,27

1,34

1,42

1,50

1,59

1,68

1,77

1,07

1,15

1,23

1,32

1,41

1,50

1,61

1,71

1,83

1,94

1,08

1,17

1,27

1,37

1,48

1,59

1,72

1,85

1,99

2,14

1,09

1,20

1,30

1,42

1,55

1,69

1,84

1,999

2,17

2,36

10

1,1

1,22

1,34

1,48

1,63

1,79

1,97

2,16

2,37

2,59

3-19

19

Future Value (U.S. Dollars)

3-20

20000

10% Simple

Interest

7% Compound

Interest

10% Compound

Interest

15000

10000

5000

0

1st Year 10th

Year

20th

Year

30th

Year

Capital market

Instruments

3-21

Bonds

Government bonds

Corporate

Foreign

Junk

Shares

Preferred

Normal

Innovations

Convertibles

21

Future Value

Single Deposit (Graphic)

Assume that you deposit $1,000 at

a compound interest rate of 7% for

2 years.

7%

$1,000

FV2

3-22

Future Value

Single Deposit (Formula)

FV1 = P0 (1+i)1

= $1,000 (1.07)

= $1,070

Compound Interest

deposit over the first year.

This is the same amount of interest you

would earn under simple interest.

3-23

Future Value

Single Deposit (Formula)

FV1

= P0 (1+i)1

FV2

= FV1 (1+i)1

= P0 (1+i)(1+i) = $1,000(1.07)(1.07)

= P0 (1+i)2

= $1,000(1.07)2

= $1,144.90

= $1,000 (1.07)

= $1,070

compound over simple interest.

3-24

General Future

Value Formula

FV1 = P0(1+i)1

FV2 = P0(1+i)2

etc.

FVn = P0 (1+i)n

or FVn = P0 (FVIFi,n) -- See Table I

3-25

FVIFi,n is found on Table I at the end

of the book or on the card insert.

3-26

Period

1

2

3

4

5

6%

1.060

1.124

1.191

1.262

1.338

7%

1.070

1.145

1.225

1.311

1.403

8%

1.080

1.166

1.260

1.360

1.469

FV2

= $1,000 (FVIF7%,2)

= $1,000 (1.145)

= $1,145 [Due to Rounding]

Period

6%

7%

8%

1

1.060

1.070

1.080

2

1.124

1.166

1.145

3

1.191

1.225

1.260

4

1.262

1.311

1.360

5

1.338

1.403

1.469

3-27

of keys for solving any

of the FV, PV, FVA,

PVA, FVAD, and PVAD

problems

N:

Number of periods

I/Y:Interest rate per period

PV:

Present value

PMT:

Payment per period

FV:

Future value

CLR TVM: Clears all of the inputs

into the above TVM keys

3-28

Inputs

I/Y

PV

PMT

FV

Compute

3-29

displayed in slides as shown above)

Press:

2nd

3-30

CLR TVM

I/Y

-1000

PV

PMT

CPT

FV

Inputs

Compute

N:

I/Y:

PV:

PMT:

FV:

3-31

-1,000

I/Y

PV

PMT

FV

1,144.90

2 periods (enter as 2)

7% interest rate per period (enter as 7 NOT .07)

$1,000 (enter as negative as you have less)

Not relevant in this situation (enter as 0)

Compute (Resulting answer is positive)

Julie Miller wants to know how large her deposit

of $10,000 today will become at a compound

annual interest rate of 10% for 5 years.

10%

$10,000

FV5

3-32

FVn = P0 (1+i)n

FV5 = $10,000 (1+ 0.10)5

= $16,105.10

Calculation

based on Table I:

FV5 = $10,000 (FVIF10%, 5)

= $10,000 (1.611)

= $16,110 [Due to Rounding]

3-33

Press:

2nd

3-34

CLR TVM

10

I/Y

-10000

PV

PMT

CPT

FV

Inputs

Compute

10

-10,000

I/Y

PV

PMT

FV

16,105.10

investment that earns 10% annually

for 5 years will result in a future value

of $16,105.10.

3-35

Quick! How long does it take to

double $5,000 at a compound rate

of 12% per year (approx.)?

We will use the Rule-of-72.

3-36

The Rule-of-72

Quick! How long does it take to

double $5,000 at a compound rate

of 12% per year (approx.)?

Approx. Years to Double = 72 / i%

72 / 12% = 6 Years

[Actual Time is 6.12 Years]

3-37

Inputs

N

Compute

12

-1,000

+2,000

I/Y

PV

PMT

FV

6.12 years

investment that earns 12% annually

will double to $2,000 in 6.12 years.

Note: 72/12% = approx. 6 years

3-38

3-39

Time value of

money - a dollar

today worth more

than a dollar

tomorrow

A safe dollar is

worth more than a

risky one

39

3-40

Theory by John B.

Williams

Based on :

dividends and

assumes long-term

decisions

Compares actual

value and real

value

40

Basics

Yield

Rate

of return

Rate

of interest

Income

3-41

Maturity

Simple interest

Compound interest

41

Present Value

Single Deposit (Graphic)

Assume that you need $1,000 in 2 years.

Lets examine the process to determine

how much you need to deposit today at a

discount rate of 7% compounded annually.

7%

$1,000

PV0

3-42

PV1

Present Value

Single Deposit (Formula)

PV0 = FV2 / (1+i)2

= FV2 / (1+i)2

0

7%

= $1,000 / (1.07)2

= $873.44

1

$1,000

PV0

3-43

General Present

Value Formula

PV0 = FV1 / (1+i)1

PV0 = FV2 / (1+i)2

etc.

PV0 = FVn / (1+i)n

or

3-44

PVIFi,n is found on Table II at the end

of the book or on the card insert.

Period

1

2

3

4

5

3-45

6%

.943

.890

.840

.792

.747

7%

.935

.873

.816

.763

.713

8%

.926

.857

.794

.735

.681

PV2

3-46

= $1,000 (PVIF7%,2)

= $1,000 (.873)

= $873 [Due to Rounding]

Period

6%

7%

8%

1

.943

.935

.926

2

.890

.873

.857

3

.840

.816

.794

4

.792

.763

.735

5

.747

.713

.681

Table of present value factor

3-47

Years

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0,99

0,98

0,97

0,96

0,95

0,94

0,935

0,93

0,92

0,91

0,98

0,96

0,94

0,92

0,91

0,89

0,87

0,86

0,84

0,83

0,97

0,94

0,92

0,89

0,86

0,84

0,82

0,79

0,77

0,75

0,96

0,92

0,89

0,85

0,82

0,79

0,76

0,74

0,71

0,68

0,95

0,91

0,87

0,82

0,78

0,75

0,71

0,68

0,65

0,62

0,94

0,89

0,84

0,79

0,75

0,70

0,67

0,63

0,596

0,56

0,93

0,87

0,81

0,76

0,71

0,67

0,62

0,58

0,55

0,51

0,92

0,85

0,79

0,73

0,68

0,63

0,58

0,54

0,50

0,47

0,914

0,84

0,77

0,70

0,64

0,59

0,54

0,50

0,46

0,42

10

0,905

0,82

0,74

0,68

0,61

0,56

0,51

0,46

0,42

0,39

47

Inputs

Compute

N:

I/Y:

PV:

PMT:

FV:

3-48

I/Y

PV

+1,000

PMT

FV

-873.44

2 periods (enter as 2)

7% interest rate per period (enter as 7 NOT .07)

Compute (Resulting answer is negative deposit)

Not relevant in this situation (enter as 0)

$1,000 (enter as positive as you receive $)

Julie Miller wants to know how large of a

deposit to make so that the money will

grow to $10,000 in 5 years at a discount

rate of 10%.

10%

$10,000

PV0

3-49

PV0 = FVn / (1+i)n

PV0 = $10,000 / (1+ 0.10)5

= $6,209.21

PV0 = $10,000 (PVIF10%, 5)

= $10,000 (.621)

= $6,210.00 [Due to Rounding]

3-50

Inputs

Compute

10

I/Y

PV

+10,000

PMT

FV

-6,209.21

future value that will earn 10% annually

for 5 years requires a $6,209.21 deposit

today (present value).

3-51

Types of Annuities

An

payments (or receipts) occurring over a

specified number of equidistant periods.

Ordinary

occur at the end of each period.

Annuity

occur at the beginning of each period.

3-52

Examples of Annuities

3-53

Insurance Premiums

Mortgage Payments

Retirement Savings

Parts of an Annuity

(Ordinary Annuity)

End of

Period 1

Today

3-54

End of

Period 2

End of

Period 3

$100

$100

$100

Each 1 Period Apart

Parts of an Annuity

(Annuity Due)

Beginning of

Period 1

$100

$100

$100

Today

3-55

Beginning of

Period 2

Beginning of

Period 3

Each 1 Period Apart

Overview of an

Ordinary Annuity -- FVA

Cash flows occur at the end of the period

i%

. . .

R

R = Periodic

Cash Flow

FVAn =

R(1+i)n-1 +

R(1+i)n-2 +

3-56

FVAn

n+1

Example of an

Ordinary Annuity -- FVA

Cash flows occur at the end of the period

$1,000

$1,000

7%

$1,000

$1,070

$1,145

FVA3 = $1,000(1.07)2 +

$1,000(1.07)1 + $1,000(1.07)0 $3,215 = FVA3

= $1,145 + $1,070 + $1,000

= $3,215

3-57

The future value of an ordinary

annuity can be viewed as

occurring at the end of the last

cash flow period, whereas the

future value of an annuity due

can be viewed as occurring at

the beginning of the last cash

flow period.

3-58

FVAn

FVA3

= R (FVIFAi%,n)

= $1,000 (FVIFA7%,3)

= $1,000 (3.215) = $3,215

Period

6%

7%

8%

1

1.000

1.000

1.000

2

2.060

2.070

2.080

3

3.184

3.246

3.215

4

4.375

4.440

4.506

5

5.637

5.751

5.867

3-59

Inputs

Compute

N:

I/Y:

PV:

PMT:

FV:

3-60

-1,000

I/Y

PV

PMT

FV

3,214.90

7% interest rate per period (enter as 7 NOT .07)

Not relevant in this situation (no beg value)

$1,000 (negative as you deposit annually)

Compute (Resulting answer is positive)

Overview View of an

Annuity Due -- FVAD

Cash flows occur at the beginning of the period

... + R(1+i)2 + R(1+i)1

= FVAn (1+i)

3-61

. . .

i%

R

n-1

R

FVADn

Example of an

Annuity Due -- FVAD

Cash flows occur at the beginning of the period

$1,000

$1,000

$1,070

7%

$1,000

$1,145

$1,225

FVAD3 = $1,000(1.07)3 +

$3,440 = FVAD3

2

1

$1,000(1.07) + $1,000(1.07)

= $1,225 + $1,145 + $1,070

= $3,440

3-62

FVADn

FVAD3

= R (FVIFAi%,n)(1+i)

= $1,000 (FVIFA7%,3)(1.07)

= $1,000 (3.215)(1.07) = $3,440

Period

6%

7%

8%

1

1.000

1.000

1.000

2

2.060

2.070

2.080

3

3.184

3.246

3.215

4

4.375

4.440

4.506

5

5.637

5.751

5.867

3-63

Inputs

-1,000

I/Y

PV

PMT

FV

3,439.94

Compute

problem, except you must change the calculator setting

to BGN first. Dont forget to change back!

Step 1:

Press

2nd

BGN

keys

3-64

Step 2:

Press

2nd

SET

keys

Step 3:

Press

2nd

QUIT

keys

Overview of an

Ordinary Annuity -- PVA

Cash flows occur at the end of the period

i%

n+1

. . .

R

R = Periodic

Cash Flow

PVAn

+ ... + R/(1+i)n

3-65

Example of an

Ordinary Annuity -- PVA

Cash flows occur at the end of the period

$1,000

$1,000

7%

$1,000

$ 934.58

$ 873.44

$ 816.30

$2,624.32 = PVA3

3-66

PVA3 =

$1,000/(1.07)1 +

$1,000/(1.07)2 +

$1,000/(1.07)3

= $2,624.32

The present value of an ordinary

annuity can be viewed as

occurring at the beginning of the

first cash flow period, whereas

the present value of an annuity

due can be viewed as occurring

at the end of the first cash flow

period.

3-67

PVAn

PVA3

= R (PVIFAi%,n)

= $1,000 (PVIFA7%,3)

= $1,000 (2.624) = $2,624

Period

6%

7%

8%

1

0.943

0.935

0.926

2

1.833

1.808

1.783

3

2.673

2.577

2.624

4

3.465

3.387

3.312

5

4.212

4.100

3.993

3-68

stream of cash flow

Table of future value factor of

annuity

Years

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1,00

1,00

1,00

1,00

1,00

1,00

1,00

1,00

1,00

1,00

2,01

2,02

2,03

2,04

2,05

2,06

2,07

2,08

2,09

2,1

3,03

3,06

3,09

3,12

3,15

3,18

3,22

3,25

3,28

3,31

4,06

4,12

4,2

4,25

4,31

4,38

4,44

4,51

4,57

4,64

5,1

5,2

5,3

5,42

5,53

5,64

5,75

5,87

5,99

6,11

6,2

6,3

6,5

6,63

6,8

6,98

7,15

7,34

7,52

7,72

7,2

7,4

7,7

7,898

8,14

8,39

8,65

8,92

9,2

9,49

8,3

8,6

8,9

9,21

9,55

9,897

10,26

10,64

11,03

11,45

9,4

9,8

10,16

10,58

11,03

11,49

11,98

12,49

13,02

13,58

10

10,5

10,95

11,46

12,01

12,58

13,18

13,82

14,49

15,19

15,94

3-69

69

annuity factor

Years

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0,99

0,98

0,97

0,96

0,95

0,94

0,93

0,925

0,917

0,91

1,97

1,94

1,91

1,89

1,86

1,83

1,81

1,78

1,76

1,74

2,94

2,88

2,83

2,76

2,72

2,67

2,62

2,58

2,53

2,49

3,90

3,81

3,72

3,63

3,55

3,47

3,39

3,31

3,24

3,17

4,85

4,71

4,58

4,45

4,33

4,21

4,10

3,99

3,89

3,79

5,796

5,60

5,42

5,24

5,08

4,91

4,77

4,62

4,49

4,36

6,73

6,47

6,23

6,00

5,79

5,58

5,39

5,21

5,03

4,87

7,65

7,33

7,02

6,73

6,46

6,21

5,97

5,75

5,53

5,33

8,57

8,16

7,79

7,44

7,11

6,8

6,52

6,25

5,99

5,76

10

9,47

8,98

8,73

8,11

7,72

7,36

7,02

6,71

6,42

6,14

3-70

70

Inputs

Compute

N:

I/Y:

PV:

PMT:

FV:

3-71

I/Y

PV

-1,000

PMT

FV

2,624.32

7% interest rate per period (enter as 7 NOT .07)

Compute (Resulting answer is positive)

$1,000 (negative as you deposit annually)

Not relevant in this situation (no ending value)

Overview of an

Annuity Due -- PVAD

Cash flows occur at the beginning of the period

i%

R

PVADn

n-1

. . .

R

R: Periodic

Cash Flow

= PVAn (1+i)

3-72

Example of an

Annuity Due -- PVAD

Cash flows occur at the beginning of the period

$1,000

$1,000

7%

$1,000.00

$ 934.58

$ 873.44

$2,808.02 = PVADn

$1,000/(1.07)2 = $2,808.02

3-73

PVADn = R (PVIFAi%,n)(1+i)

PVAD3 = $1,000 (PVIFA7%,3)(1.07)

= $1,000 (2.624)(1.07) = $2,808

Period

6%

7%

8%

1

0.943

0.935

0.926

2

1.833

1.808

1.783

3

2.673

2.577

2.624

4

3.465

3.387

3.312

5

4.212

4.100

3.993

3-74

Inputs

I/Y

PV

-1,000

PMT

FV

2,808.02

Compute

problem, except you must change the calculator setting

to BGN first. Dont forget to change back!

Step 1:

Press

2nd

BGN

keys

3-75

Step 2:

Press

2nd

SET

keys

Step 3:

Press

2nd

QUIT

keys

of Money Problems

1. Read problem thoroughly

2. Determine if it is a PV or FV problem

3. Create a time line

4. Put cash flows and arrows on time line

5. Determine if solution involves a single

CF, annuity stream(s), or mixed flow

7. Check with financial calculator (optional)

3-76

Julie Miller will receive the set of cash

flows below. What is the Present Value

at a discount rate of 10%?

1

10%

$600

PV0

3-77

How to Solve?

1. Solve a piece-at-a-time by

discounting each piece back to t=0.

2. Solve a group-at-a-time by first

breaking problem into groups of

annuity streams and any single

cash flow group. Then discount

each group back to t=0.

3-78

Piece-At-A-Time

0

1

10%

$600

$545.45

$495.87

$300.53

$273.21

$ 62.09

3-79

Group-At-A-Time (#1)

0

10%

$600

$1,041.60

$ 573.57

$ 62.10

$1,677.27 = PV0 of Mixed Flow [Using Tables]

$600(PVIFA10%,2) =

$600(1.736) = $1,041.60

$400(PVIFA10%,2)(PVIF10%,2) = $400(1.736)(0.826) = $573.57

$100 (PVIF10%,5) =

$100 (0.621) =

$62.10

3-80

Group-At-A-Time (#2)

0

$400

$400

$400

$200

$200

4

$400

$1,268.00

Plus

PV0 equals

$1677.30.

$347.20

Plus

5

$100

$62.10

3-81

Problem using CF Registry

Use

the highlighted

key for starting the

process of solving a

mixed cash flow

problem

Press

3-82

the CF key

and down arrow key

through a few of the

keys as you look at

the definitions on

the next slide

Problem using CF Registry

Defining the calculator variables:

For CF0:

This is ALWAYS the cash flow occurring

at time t=0 (usually 0 for these problems)

For Cnn:* This is the cash flow SIZE of the nth

group of cash flows. Note that a group may only

contain a single cash flow (e.g., $351.76).

For Fnn:*

This is the cash flow FREQUENCY of the

nth group of cash flows. Note that this is always a

positive whole number (e.g., 1, 2, 20, etc.).

3-83

first cash flow is C01, while the tenth cash flow is C10.

Problem using CF Registry

Steps in the Process

3-84

Step 1:

Press

Step 2:

Press

Step 3: For CF0 Press

CF

2nd

0

CLR Work

Enter

Step 4:

Step 5:

Step 6:

Step 7:

600

2

400

2

Enter

Enter

Enter

Enter

For F01 Press

For C02 Press

For F02 Press

key

keys

keys

keys

keys

keys

keys

Problem using CF Registry

Steps in the Process

3-85

100

Enter

keys

Enter

keys

Step 10:

Step 11:

Press

Press

keys

key

NPV

Enter

10

Step 13:

Press

CPT

Result:

keys

key

Frequency of

Compounding

General Formula:

FVn = PV0(1 + [i/m])mn

3-86

n:

m:

i:

FVn,m:

Number of Years

Compounding Periods per Year

Annual Interest Rate

FV at the end of Year n

PV0:

Impact of Frequency

Julie Miller has $1,000 to invest for 2

years at an annual interest rate of

12%.

Annual

FV2

= 1,000(1+ [.12/1])(1)(2)

= 1,254.40

Semi

FV2

= 1,000(1+ [.12/2])(2)(2)

= 1,262.48

3-87

Impact of Frequency

Qrtly

FV2

= 1,000(1+ [.12/4])(4)(2)

= 1,266.77

Monthly

FV2

= 1,000(1+ [.12/12])(12)(2)

= 1,269.73

Daily

FV2

= 1,000(1+[.12/365])(365)(2)

= 1,271.20

3-88

Problem (Quarterly)

Inputs

Compute

2(4)

12/4

-1,000

I/Y

PV

PMT

FV

1266.77

investment that earns a 12% annual

rate compounded quarterly for 2 years

will earn a future value of $1,266.77.

3-89

Problem (Quarterly Altern.)

Press:

2nd P/Y

2nd

QUIT

12

I/Y

-1000

PV

PMT

2

3-90

CPT

ENTER

2nd xP/Y N

FV

Problem (Daily)

Inputs

N

Compute

I/Y

PV

PMT

FV

1271.20

investment that earns a 12% annual

rate compounded daily for 2 years will

earn a future value of $1,271.20.

3-91

Problem (Daily Alternative)

Press:

2nd

QUIT

12

I/Y

-1000

PV

PMT

2

3-92

CPT

2nd xP/Y N

FV

Effective Annual

Interest Rate

Effective Annual Interest Rate

The actual rate of interest earned

(paid) after adjusting the nominal

rate for factors such as the number

of compounding periods per year.

(1 + [ i / m ] )m - 1

3-93

BWs Effective

Annual Interest Rate

Basket Wonders (BW) has a $1,000

CD at the bank. The interest rate

is 6% compounded quarterly for 1

year. What is the Effective Annual

Interest Rate (EAR)?

EAR = ( 1 + 6% / 4 )4 - 1

= 1.0614 - 1 = .0614 or 6.14%!

3-94

Converting to an EAR

Press:

3-95

2nd

I Conv

ENTER

ENTER

CPT

2nd

QUIT

1.

2.

(Loan balance at t-1) x (i% / m)

3.

(Payment - interest from Step 2)

4.

(Balance - principal payment from Step 3)

5.

3-96

Julie Miller is borrowing $10,000 at a

compound annual interest rate of 12%.

Amortize the loan if annual payments are

made for 5 years.

Step 1: Payment

PV0

= R (PVIFA i%,n)

$10,000

= R (PVIFA 12%,5)

$10,000

= R (3.605)

R = $10,000 / 3.605 = $2,774

3-97

End of

Year

0

Payment

Interest

Principal

---

---

---

Ending

Balance

$10,000

$2,774

$1,200

$1,574

8,426

2,774

1,011

1,763

6,663

2,774

800

1,974

4,689

2,774

563

2,211

2,478

2,775

297

2,478

$13,871

$3,871

$10,000

3-98

Inputs

Compute

12

10,000

I/Y

PV

PMT

FV

-2774.10

that costs 12% annually for 5 years and

will be completely paid off at that time will

require $2,774.10 in annual payments.

3-99

Functions of the Calculator

Press:

2nd

Amort

ENTER

ENTER

Results:

BAL = 8,425.90

PRN = -1,574.10

INT =

-1,200.00

3-100

Functions of the Calculator

Press:

2nd

Amort

ENTER

ENTER

Results:

BAL = 6,662.91

PRN = -1,763.99

INT =

-1,011.11

3-101

Functions of the Calculator

Press:

2nd

Amort

ENTER

ENTER

Results:

0.00

PRN =-10,000.00

INT =

BAL =

-3,870.49

3-102

Usefulness of Amortization

3-103

1.

taxable income of the firm.

2.

quantity of outstanding debt

may be used in financing the

day-to-day activities of the firm.

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