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Agenda – 4 /17/2013. Discuss interest and the time value of money Explore the Excel time value of money functions Examine the accounting measures of profitability Course Evaluations. Some Excel financial functions. Excel Functions are Excel Functions To use them, you must understand the

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Agenda – 4 /17/2013

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Agenda 4 17 2013
Agenda – 4/17/2013

  • Discuss interest and the time value of money

  • Explore the Excel time value of money functions

  • Examine the accounting measures of profitability

  • Course Evaluations



Agenda 4 17 2013

Excel Functions are Excel Functions

To use them, you must understand the

TIME VALUE OF MONEY


Understanding time value of money
Understanding time value of money

  • Money will increase in value over time if the money is invested and can make more money.

  • If you have $1,000 today, it will be worth more tomorrow if you invest that $1,000 and it earns additional money (interest or some other return on that investment).

  • If you have $1,000 today, it will NOT be worth more tomorrow if you put it in an envelope and hide it in a drawer. Then the time value of money does not apply as an increase. It will most likely decrease in value because of inflation. Of course, you won’t lose the whole $1,000 either…


Introduction to interest calculations
Introduction to Interest Calculations

  • When you borrow money you pay interest

  • When you loan money, you receive interest

  • When you make a payment

    • part of the payment is applied to interest

    • Part of the payment is applied to principal


Types of interest
Types of Interest

  • Simple interest

    • Interest is paid only on the principal

    • Many certificates of deposit work this way

  • Compound interest

    • Interest is added to the principal each period

    • Interest is calculated on the principal plus any accrued interest

    • Compounding can occur on different periods

      • Annually, quarterly, monthly, daily


Difference between simple and compound interest
Difference between simple and compound interest

  • Assume that you have $1,000 to invest. $1,000 is the present value (PV) of your money.

  • You can invest it and receive “simple” interest or you can earn “compound” interest.

  • The money that you have at the end of the time you have invested it is called the “future value” (FV) of your money.


Future value of money
Future value of money

  • Simple interest is always calculated on the initial $1,000. 5% interest on $1,000 is $50. Always $50.

  • When interest is paid on not only the principal amount invested, but also on any previous interest earned, this is called compound interest.

    FV = Principal + (Principal x Interest)

    = 1000 + (1000 x .05)

    = 1000 (1 + i)

    = PV (1 + i)


Simple vs compound interest comparison
Simple vs. compound interest comparison

$1,000 Invested at 5% return


How much money would you have if you invested 1000 for 5 years at an interest rate of 5 a year
How much money would you have if you invested $1000 for 5 years at an interest rate of 5% a year?

How much money would you have if you invested $1000 each year for 5 years at an interest rate of 5% a year?


Time value of money functions
Time years at an interest rate of 5% a year?Value of Money Functions

  • We are just solving the same equation for a different variable

    • RATE determines the interest rate

    • NPER determines the number of periods

    • PMT determines the payment

    • PV determines the present value of a transaction

    • FV determines the future value of a transaction


The rate function
The years at an interest rate of 5% a year?RATEFunction

  • Determines the interest rate per period based on

    • The number of periods

    • The payment

    • The present value

    • The future value

    • The type


The nper function
The years at an interest rate of 5% a year?NPERFunction

  • Determines the number of periods based on

    • The interest rate

    • The payment

    • The present value

    • The future value

    • The type


Future value function
Future Value Function years at an interest rate of 5% a year?

FV(rate, nper, pmt, pv, type)


Agenda 4 17 2013
If you receive $5000 5 years from now, and the “going” interest rate is 5%, how much is that money worth today?


Present value function
Present Value Function interest rate is 5%, how much is that money worth today?

PV(rate, nper, pmt, fv, type)


What about if you borrow money
What about if you borrow money? interest rate is 5%, how much is that money worth today?

  • If you borrow money, the lender wants to earn “compound” money on his/her/its investment.

  • If you borrow $1000 at 10%, then you won’t pay back just $1,100 (unless you pay it back at once during the initial time period).

  • You will pay it back “compounded”. Interest will be calculated each period on your remaining balance.



Agenda 4 17 2013

What would that same amortization table (also called a schedule) look like if the interest was compounded AFTER you paid, rather than BEFORE you paid?

(this is a type 1 on Excel financial functions)



Types of financial questions asked
Types of financial questions asked interest

  • How much will it cost each month to pay off a loan if I want to borrow $150,000 at 4% interest each year for 30 years? (PMT function)

  • Assume that you need to have exactly $40,000saved 10 years from now. How much must you deposit each year in an account that pays 2% interest, compounded annually, so that you reach your goal of $40,000? (PMT function)

  • If you invest $2,000 today and accumulate $2,676.45 after exactly five years, what rate of annual compound interest did you earn? (INTRATE function)


Payment function
Payment function interest

PMT(rate, nper, pv, fv, type)


The pmt function example
The interestPMT Function (Example)


The ipmt function introduction
The interestIPMT Function (Introduction)

  • Use IPMT to calculate the interest applicable to a particular period

    • Use the initial balance for the present value no matter the period

  • Use PPMT to calculate the principal applicable to a particular period

  • The arguments to both functions are the same


Interest payment
Interest Payment interest

IPMT(rate, per, nper, pv, fv, type)


Principal payment
Principal Payment interest

PPMT(rate, per, nper, pv, fv, type)


The cumipmt function introduction
The interestCUMIPMT Function (Introduction)

CUMIPMT calculates the cumulative interest between two periods

CUMPRINC calculates the cumulative principal between two periods

The arguments to both functions are the same

Functions require the analysis tool pack add-in


Cumulative interest payments
Cumulative Interest Payments interest

CUMIPMT(rate, nper, pv, start_period, end_period, type)


Financial questions
Financial questions interest

  • If you borrow $1,000 for 5 years and pay 4% yearly interest compounded monthly, how much interest will you pay?

    • First do the calculation.

    • Second, what Excel formula would you use to do the calculation for you?

    • Third, what Excel formula would calculate the payment?

  • If you invest $1,000 and receive 3% yearly interest compounded quarterly, how much will you have at the end of 10 years?


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