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THE TIME VALUE OF MONEY

THE TIME VALUE OF MONEY. BACK TO THE FUTURE. Future Value. Investment Interest or Yield. Yield 10%. Investment $1,000. 10. 1. x. ___. =. =. .1. =. $100 Annual Yield. 100. ___. 10. .1. .5. .08. .065. 10% =. 50% =. 8% =. 6.5% =. Compound Interest.

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THE TIME VALUE OF MONEY

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  1. THE TIME VALUE OF MONEY BACK TO THE FUTURE

  2. Future Value Investment Interest or Yield Yield10% Investment$1,000 10 1 x ___ = = .1 = $100 Annual Yield 100 ___ 10 .1 .5 .08 .065 10% = 50% = 8% = 6.5% = Compound Interest -- Interest earning interest How often is interest added to investment principal? Examples: annually, monthly, weekly, daily Annually$1,000 @ 12% = $120 Monthly Interest = $10 Monthly $1,000 @ 12% = $126.83 Month 1 $1,000 x .12 /12 = $10 Month 2 $1,010 x .12 /12 = $10.10 Month 3 $1,020 x .12 /12 = $10.30

  3. Future Value Computation Beginning of Year End of Year 1 = 100% Investment $1,000 x 1 = $1,000 Income $1,000 x .08 = 80 _____ $1,080 $1,000 x 1.08 = $1,080 $1,080 x 1.08 = $1,166 Investment x (1 + Interest Rate) = Future Value Present Value (1 + int) x = Future Value End of year 1 (1 + int) 2 x PV = Future Value End of year 2 PV x (1 + int) n =Future Value Number of Payment Periods

  4. FUTURE VALUE

  5. FUTURE VALUE Future Value Computation Beginning of Year End of Year x Investment 1 = $100,000 $100,000 x Income $100,000 .08 = 8,000 _______ $108,000 $100,000 x 1.08 = $108,000 x 1.08 = $116,640 $108,000

  6. In your browser Type in www.openoffice.org Click on the “I want to download OpenOffice.org” button OpenOffice.org calc

  7. Click on the “Download now!” button

  8. Save the file to your Desktop Go to your desktop and double click the OpenOffice.org Icon to install it.

  9. OpenOffice.org calc Click the ‘Insert Function’ (fx) icon OpenOffice.org calc FUTURE VALUE

  10. The ‘Function Wizard’ Box Appears OpenOffice.org calc FUTURE VALUE

  11. The ‘Function Wizard’ Box Appears OpenOffice.org calc Double click on ‘FV’ Highlight ‘FV’ FUTURE VALUE

  12. The ‘function’ formula Open Office utilizes appears as you type The calculated answer appears here even before you click the ‘OK’ icon OpenOffice.org calc Type ‘.08’ Type ‘2’ Type ‘0’ Type ‘-100000’ Then click ‘OK’ The ‘Function Arguments’ Boxes Appears FUTURE VALUE

  13. Positive and Negative Numbers Ask yourself “Does this financial transaction allow me to put money IN my pocket or require me to take money OUT of my pocket? IN your pocket = type in a POSITIVE Number OUT of your pocket = type in a NEGATIVE Number If you take $100,000 and put it in an investment where did the $100,000 come from? OUT of your pocket = -100,000 After 2 years the investment gives you $116,640 IN your pocket

  14. Positive and Negative Numbers

  15. Future Value of a Steam of Payments Future Value Computation Beginning of Year End of Year x Investment 1 = $100,000 $100,000 x Income $100,000 .08 = 8,000 _______ $108,000 Investment = $208,000 + $100,000 x Income $208,000 .08 = 16,640 _______ $224,640

  16. Future Value of a Steam of Payments Click on function icon (fx) OpenOffice.org calc Type ‘fv’ (future value) Click on ‘Next’

  17. Future Value of a Steam of Payments The Future Value ‘Function Wizard’ Box Appears OpenOffice.org calc Type ‘.08’ Type ‘2’ Type ‘-100,000’ Type ‘0’ Scroll Down

  18. Future Value of a Steam of Payments OpenOffice.org calc Type Type is a value representing the timing of the payment: Investment Contribution Payment at the beginning of the period = 1 First Pension Check Debt Payment Payment at the end of the period = 0 or omitted

  19. Future Value of a Steam of Payments See the Answer OpenOffice.org calc Type ‘1’ Then click ‘OK’

  20. Compounding What if your money compounds monthly orpayments are made monthly instead of annually? 12 percent interest annually = .12 monthly = .12/12 quarterly = .12/4 payments annually = 1 monthly = 1 * 12 quarterly = 1 * 4

  21. PRESENT VALUE Present Value Computation Beginning of Year End of Year 1.08 / Investment = $92,593 $100,000 1.08 / Investment = $85,734 $92,593 $92,593 x 1.08 = $100,000

  22. PRESENT VALUE Click on function icon (fx) OpenOffice.org calc Type ‘pv’ (present value) Click on ‘Next’

  23. PRESENT VALUE The ‘Function Wizard’ Box Appears OpenOffice.org calc Type ‘.08’ Type ‘2’ Type ‘0’ Type ‘100000’ Then click ‘OK’

  24. Present Value of a Stream of Payments Present Value Computation End of Year Beginning of Year 1.08 / Investment = $92,593 $100,000 2 1.08 / Investment = $85,734 $100,000 3 1.08 / Investment = $79,383 $100,000

  25. Present Value of a Stream of Payments Present Value Computation End of Year Beginning of Year 1.08 / Investment = $92,593 $100,000 2 1.08 / Investment = $85,734 $100,000 3 1.08 / Investment = $79,383 $100,000 ________ $257,710

  26. Present Value of a Stream of Payments Click on function icon (fx) OpenOffice.org calc Type ‘pv’ (present value) Click on ‘OK’

  27. PRESENT VALUE The ‘Function Wizard’ Box Appears OpenOffice.org calc Type ‘.08’ Type ‘3’ Type ‘100,000’ Type ‘0’ Scroll Down

  28. PRESENT VALUE OpenOffice.org calc Verify Answer Type ‘0’ Then click ‘OK’

  29. FourPractice Problems

  30. Future Value of a Lump Sum OpenOffice.org calc

  31. Future Value of a Stream of Payments OpenOffice.org calc

  32. Present Value of a Stream of Payments OpenOffice.org calc

  33. Present Value of a Future Lump Sum OpenOffice.org calc

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