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CHAPTER6
TimeValueofMoneyFuturevaluePresentvalueAnnuitiesRatesofreturnAmortization
TimelinesShowthetimingofcashflows.Tickmarksoccurattheendofperiods,soTime0istoday;Time1istheendofthefirstperiod(year,month,etc.)orthebeginningofthesecondperiod.CF0CF1CF3CF20123i%
Drawingtimelines:
$100lumpsumduein2years;
3-year$100ordinaryannuity1001001000123i%3year$100ordinaryannuity100012i%$100lumpsumduein2years
Drawingtimelines:
Unevencashflowstream;CF0=-$50,
CF1=$100,CF2=$75,andCF3=$5010050750123i%-50Unevencashflowstream
Whatisthefuturevalue(FV)ofaninitial$100after3years,ifI/YR=10%?FindingtheFVofacashfloworseriesofcashflowswhencompoundinterestisappliediscalledcompounding.FVcanbesolvedbyusingthearithmetic,financialcalculator,andspreadsheetmethods.FV=?012310%100
SolvingforFV:
ThearithmeticmethodAfter1year:FV1=PV(1+i)=$100(1.10)
=$110.00After2years:FV2=PV(1+i)2=$100(1.10)2
=$121.00After3years:FV3=PV(1+i)3=$100(1.10)3
=$133.10Afternyears(generalcase):FVn=PV(1+i)n
SolvingforFV:
ThecalculatormethodSolvesthegeneralFVequation.Requires4inputsintocalculator,andwillsolveforthefifth.(SettoP/YR=1andENDmode.)INPUTSOUTPUTNI/YRPMTPVFV3100133.10-100
PV=?100Whatisthepresentvalue(PV)of$100duein3years,ifI/YR=10%?FindingthePVofacashfloworseriesofcashflowswhencompoundinterestisappliediscalleddiscounting(thereverseofcompounding).ThePVshowsthevalueofcashflowsintermsoftoday’spurchasingpower.012310%
SolvingforPV:
ThearithmeticmethodSolvethegeneralFVequationforPV:PV=FVn/(1+i)nPV=FV3/(1+i)3 =$100/(1.10)3 =$75.13
SolvingforPV:
ThecalculatormethodSolvesthegeneralFVequationforPV.ExactlylikesolvingforFV,exceptwehavedifferentinputinformationandaresolvingforadiffer
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