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Time Value of Money Tutorial

Time Value of Money Tutorial. Prepared by Ronald Moy Tobin College of Business St. John’s University. Solving Time Value of Money Problems. To solve a time value of money problem, you need to ask yourself a number of questions in order to determine which formula you will be using.

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Time Value of Money Tutorial

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  1. Time Value of Money Tutorial Prepared by Ronald Moy Tobin College of Business St. John’s University

  2. Solving Time Value of Money Problems • To solve a time value of money problem, you need to ask yourself a number of questions in order to determine which formula you will be using. Let’s Begin* * Please view as a slideshow

  3. Type of Cash Flow • Is the amount one lump sum of money? YesNo

  4. Present or Future Value • Are you trying to determine what something is worth in the future or what some future amount is worth today? Worth TodayWorth in the Future Previous slideBeginning of tutorial

  5. Annuity or Multiple Cash Flow • Will you be paying (or receiving) an equal sum of money made at equal intervals? YesNo Previous slideBeginning of tutorial

  6. Ordinary Annuity or Annuity Due? • Is the first cash flow at the beginning of the period or at the end of the period? BeginningEnd Previous slideBeginning of tutorial

  7. Present or Future Value • You are finding the value of multiple cash flows. Are you looking for the value of these cash flows in the future or the value today? Value in the FutureValue Today Previous slideBeginning of tutorial

  8. Future Value of Multiple Cash Flows • The future value of multiple cash flows is Previous slideExample Beginning of tutorial

  9. Annuity Due • You are dealing with an annuity due. Are you looking for the value of the annuity in the future or what the annuity is worth today? Worth in the FutureWorth Today Previous slideBeginning of tutorial

  10. Present Value of Multiple Cash Flows • You are finding the present value of multiple cash flows Previous slideExample Beginning of tutorial

  11. Ordinary Annuity • You are dealing with an ordinary annuity. Are you looking for the value of the annuity in the future or what the annuity is worth today? Worth in the FutureWorth Today Previous slideBeginning of tutorial

  12. Present Value of Ordinary Annuity • You are looking for the present value of an ordinary annuity. The present value of an annuity formula is, Previous slideExample Beginning of tutorial

  13. Present Value of Annuity Due • You are looking for the present value of an annuity due. The present value of an annuity formula is, Previous slideExample Beginning of tutorial

  14. Future Value of Ordinary Annuity • You are looking for the future value of an ordinary annuity. The formula for the future value of an annuity is Previous slideExample Beginning of tutorial

  15. Future Value of Annuity Due • You are looking for the future value of an annuity due. The formula for the future value of an annuity is Previous slideExample Beginning of tutorial

  16. Present Value of a Lump Sum • You are looking for the present value of a lump sum. The present value for a lump sum is Previous slidePresent value example Beginning of tutorial

  17. Future Value of a Lump Sum • You are looking for the future value of a lump sum. The future value of a lump sum is, Previous slideFuture Value example Beginning of tutorial

  18. Future Value a Lump Sum Example • Find the future value in 10 years of $100 received today, if the interest rate is 8%. Previous slideFV Calculator Beginning of tutorialTimeline example

  19. Future Value Time Line • Previous slideBeginning of tutorial 1 2 3 4 10 0 . . . $215.89 $100

  20. Present Value of a Lump Sum Example • Find the present value of $1,000 received 5 years from today if the interest rate is 9%. Previous slideCalculator example Beginning of tutorialTimeline example

  21. Present Value Time Line Previous slideBeginning of tutorial 0 1 2 3 4 5 $1,000 $649.93

  22. Present Value of an Ordinary Annuity • You can afford to make monthly car payments of $500 per month for 48 months. If the interest rate is 12% (1% per month). How much can you afford to spend on a car? Assume that the first car payment will be made in one month. Previous slideCalculator example Beginning of tutorial

  23. Present Value of an Annuity Due Example • You can afford to make monthly car payments of $500 per month for 48 months. If the interest rate is 12% (1% per month). How much can you afford to spend on a car? Assume that the first car payment will be made today. Previous slideCalculator example Beginning of tutorial

  24. Future Value of an Ordinary Annuity Example • Suppose you want to start saving next year for your retirement. You save $1,000 per year for the next 40 years. If the interest rate is 10%, how much will you have in your account after you make the last deposit? Previous slideCalculator example Beginning tutorial

  25. Future Value of an Annuity Due Example • Suppose you want to start saving today for your retirement. You save $1,000 per year for the next 40 years. If the interest rate is 10%, how much will you have in your account after you make the last deposit? Previous slideCalculator example Beginning of tutorial

  26. Present Value of Multiple Cash Flows Example • You are considering an investment that will pay you $1,000 in one year, $2,000 in two years and $3,000 in three years. If you want to earn 10% on your money, how much would you be willing to pay? Previous slideCalculator example Beginning of tutorialTimeline example

  27. 0 1 2 3 4 1,000 2,000 3,000 909.09 1,652.89 2,253.94 4,815.92 PV Time Line – Multiple Cash Flows Previous slideBeginning of tutorial

  28. Future Value of Multiple Cash Flows Example • Suppose you invest $500 in a mutual fund today and $600 in one year. If the fund pays 9% annually, how much will you have in two years? Previous slideTimeline example Beginning of tutorial

  29. FV Time Line – Multiple Cash Flows Previous slide Beginning of tutorial 0 1 2 3 4 5 $500 $600 $654.00 $594.05 $1,248.05

  30. PV Calculator • Calculator solution Previous slideBeginning of tutorial

  31. FV Calculator • Calculator solution Previous slideBeginning of tutorial

  32. Calc Ex. PV Ordinary Annuity • Calculator solution • Make sure calculator is set for “END” • Set by 2nd BGN 2nd Enter Previous slideBeginning of tutorial

  33. Calc Ex PV Annuity Due • Calculator solution • Make sure calculator is set for “BEG” • Set by 2nd BGN 2nd Enter Previous slideBeginning of tutorial

  34. Calc Ex FV Ordinary Annuity • Calculator solution • Make sure calculator is set for “END” • Set by 2nd BGN 2nd Enter Previous slideBeginning of tutorial

  35. FV Annuity Due • Calculator solution • Make sure calculator is set for “BEG” • Set by 2nd BGN 2nd Enter Previous slideBeginning of tutorial

  36. PV Multiple Cash Flows • In this case, you will use the Cash Flow Worksheet on the calculator. • CF • CF0 • CF01 1000 Enter • F01 • CF02 2000 Enter • F02 • CF03 3000 Enter • F03 • NPV 10 Enter • CPT 4,815.93 Previous slideBeginning of tutorial

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