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Time Value of Money: Future Value Present Value Rates of Return Amortization
Time Value of Money: Future Value Present Value Rates of Return Amortization
CHAPTER 5
Time Value of Money
Future value
Present value
Rates of return
Amortization
Copyright © 2002 by Harcourt, Inc. All rights reserved.
7-2
0 1 2 3
i%
0 1 2 Year
i%
100
0 1 2 3
i%
0 1 2 3
i%
-50 100 75 50
0 1 2 3
10%
100 FV = ?
After 1 year:
FV1 = PV + INT1 = PV + PV(i)
= PV(1 + i)
= $100(1.10)
= $110.00.
After 2 years:
FV2 = PV(1 + i)2
= $100(1.10)2
= $121.00.
Copyright © 2002 by Harcourt, Inc. All rights reserved.
7-8
After 3 years:
In general,
INPUTS
3 10 -100 0
N I/YR PV PMT FV
OUTPUT 133.10
0 1 2 3
10%
PV = ? 100
PV =
FVn
(1 + i) n
= FVn ( ) 1 n
1+i .
1
PV = $100 1.10 ( ) = $100(PVIF 3
)
i,n
= $100(0.7513) = $75.13.
INPUTS
3 10 0 100
N I/YR PV PMT FV
OUTPUT -75.13
Solve for n:
FVn = $1(1 + i)n;
$2 = $1(1.20)n
Use calculator to solve, see next slide.
INPUTS 20 -1 0 2
N I/YR PV PMT FV
OUTPUT3.8
Graphical Illustration:
FV
2
1 3.8
0 Year
1 2 3 4
Copyright © 2002 by Harcourt, Inc. All rights reserved.
7 - 17
Ordinary Annuity
0 1 2 3
i%
0 1 2 3
10%
INPUTS
3 10 0 -100
N I/YR PV PMT FV
OUTPUT 331.00
0 1 2 3
10%
INPUTS
3 10 100 0
N I/YR PV PMT FV
OUTPUT -248.69
0 1 2 3
10%
INPUTS
3 10 100 0
N I/YR PV PMT FV
OUTPUT -273.55
0 1 2 3 4
10%
$100 (1 + i )3 = $125.97.
INPUTS
3 -100 0 125.97
N I/YR PV PMT FV
OUTPUT 8%
INPUTS 45 12 0 -1095
N 1,487,261.89
I/YR PV PMT FV
OUTPUT
INPUTS 25 12 0 -1095
N 146,000.59
I/YR PV PMT FV
OUTPUT
INPUTS 25 12 0 1487261.89
N -11,154.42
I/YR PV PMT FV
OUTPUT
0 1 2 3
10%
100 133.10
Annually: FV3 = $100(1.10)3 = $133.10.
0 1 2 3
0 1 2 3 4 5 6
5%
100 134.01
Semiannually: FV6 = $100(1.05)6 = $134.01.
Copyright © 2002 by Harcourt, Inc. All rights reserved.
7 - 33
EFF = ( 1+ m)– 1
iNom m
EARAnnual = 10%.
mn
æ iNomö
FVn = PVç1 + ÷ .
è mø
2x3
æ 0.10ö
FV3S = $100ç1 + ÷
è 2 ø
= $100(1.05)6 = $134.01.
FV3Q = $100(1.025)12 = $134.49.
Copyright © 2002 by Harcourt, Inc. All rights reserved.
7 - 45
What’s the value at the end of Year 3
of the following CF stream if the
quoted interest rate is 10%,
compounded semiannually?
0 1 2 3 4 5 6 6-mos.
5% periods
0 1 2 3 4 5 6
5%
EAR = ( 0.10
1+ 2 ) – 1 = 10.25%.
2
NOM% = 10.
P/YR = 2.
EFF% = 10.25.
0 1 2 3
5%
90.70
82.27
74.62
247.59
Copyright © 2002 by Harcourt, Inc. All rights reserved.
7 - 52
Amortization
0 1 2 3
10%
3
INPUTS 10 -1000 0
N I/YR PV PMT FV
OUTPUT 402.11
302.11
Principal Payments
0 1 2 3
Level payments. Interest declines because
outstanding balance declines. Lender earns
10% on loan outstanding, which is falling.
Copyright © 2002 by Harcourt, Inc. All rights reserved.
7 - 58