TIME VALUE OF MONEY

Present Value
Present value of a lump sum

=
) k + (1
1
* FV PVIF FV = PV
T
T k,
*
Example 1: Find the present value of a $100 cash flow that is to be received 5 years from now if
the interest rate euals 10!"
#resent $alue Future $alue #$%F&10!,5'
$62.09 $100 0"()0*)1
#$ + 100 * #$%F
10!,5
+ ()"0*
Calculator Inputs
n + 5 i + 10! #$ + , #-. + 0 F$ + 100
Present value of an annuity
/ote: 0n annuity is a stream of eual cash flows that occur at eual intervals such as monthly or
annually"
( )
( )

+
=

=

T
T
t
T
1 = t
T k
k k
k
PMT
k
k
PMT
) k + (1
1
* PMT PVIFA PMT = PV
1
1 1
*
1
1
1
*
*
,
Example ): Find the present value of a $100 annuity that is to be received annually over the next 5
years if the interest rate euals 10!"
#resent $alue 0nnuity #$%F0&10!,5'
$379.08 $100 1"2*0232
#$ + 100 #$%F0
10!,5
+ 12*"03
Calculator Inputs
n + 5 i + 10! #$ + , #-. + 100 F$ + 0
Example 1: Find the present value of a $100 annuity that is to be received uarterly over the next
5 years if the interest rate euals 10!"
#resent $alue 0nnuity #$%F0&)"5!,)0'
!""8.92 $100 15"53*1()
#$ + 100 #$%F0
)"5!,)0
+ 1,553"*)
Calculator Inputs
n + )0 i + )"5! #$ + , #-. + 100 F$ + 0
/ote: .he discount rate must match the annuity period &i"e", for a uarterly annuity use a
uarterly rate, 4
nom
56"
/ote: For an annuity due &i"e", for be7innin7 of the year payments', multiply the present value by
&18interest rate per period'" .he present values eual $61("** and $1,5*2"3* for examples ) and
1 respectively"
Present Value Lump Sum - Compounding Effects:
0nnual, 9emi:annual, ;uarterly, -onthly, <ee4ly, =aily

) k
+ (1
* FV =
PVIF
* FV =
PV
T
eff
T , k T
eff
1
Example 6: Find the present value of a $100 cash flow that is to be received 5 years from now if
the interest rate euals 10! compounded uarterly usin7 the effective annual rate to ta4e the
compoundin7 effect into consideration"
#resent $alue Future $alue #$%F&4,.' 4&eff' . >ompoundin7
$6.03 $100 0"(10)21 10"131)3*
!
5 ;uarterly
Calculator Inputs
n + 5 i + 10"131)3*! #$ + , #-. + 0 F$ + 100

m
k
FV
=
PVIF
* FV =
PV
m T
nom
m * T , m k T
nom *
5
1

+
Example 5: Find the present value of a $100 cash flow that is to be received 5 years from now if
the interest rate euals 10! compounded uarterly usin7 the rate per period to ta4e the
compoundin7 effect into consideration"
#resent $alue Future $alue #$%F&4,.' 4&nom'56 .*m >ompoundin7
$6.03 $100 0"131)3* )"5! 5*6 ;uarterly
Calculator Inputs
n + )0 i + )"5! #$ + , #-. + 0 F$ + 100
>ontinuous
e
* FV =
PV
T k
T
nom

Example (: Find the present value of a $100 cash flow that is to be received 5 years from now if
the interest rate euals 10! compounded continuously usin7 the effective annual rate to ta4e the
compoundin7 effect into consideration"
#resent $alue Future $alue #$%F&4,.' 4&eff' . >ompoundin7
$60.6" $100 0"(0(511 10"5120*)
!
5 >ontinuous
Calculator Inputs
n + 5 i + 10"131)3*! #$ + , #-. + 0 F$ + 100
/ote: .o calculate the effective rate use m nom k eff k ' & ' & = for discrete compoundin7, where
m euals the number of periods5year such as 6 for uarterly compoundin7 or
1 ' &
' &
=
nom k
e eff k for continuous compoundin7"
Future Value
Future value of a lump sum
) k + (1 * PV FVIF PV = FV
T
T k
=
,
*
Example 2: Find the future value in 5 years of a $100 cash flow if the interest rate euals 10!"
Future $alue #resent $alue F$%F&10!,5'
$6.0" $100 1"(10510
F$ + 100 F$%F
10!,5
+ 1(1"05
>alculator %nputs
n + 5 i + 10! #$ + 100 #-. + 0 F$ + ,
Future value of an annuity
( )

+
=

=

k
k
PMT
) k + (1 * PMT FVIFA PMT = FV
T
t - T
T
1 = t
T k
1 1
*
*
,
Example 3: Find the future value at time 5 of a $100 annuity that is to be received annually over
the next 5 years if the interest rate euals 10!"
Future $alue 0nnuity F$%F0&10!,5'
$60." $100 ("105100
F$ + 100 F$%F0
10!,5
+ (10"51
>alculator %nputs
n + 5 i + 10! #$ + 0 #-. + 100 F$ + ,
Example *: Find the future value at time 5 of a $100 annuity that is to be received uarterly over
the next 5 years if the interest rate euals 10!"
Future $alue 0nnuity F$%F0&)"5!,)0'
$2!""#.#7 $100 )5"566(53
F$ + 100 F$%F0
)"5!,)0
+ ),556"62
Calculator Inputs
n + )0 i + )"5! #$ + 0 #-. + 100 F$ + ,
/ote: .he discount rate must match the annuity period &i"e", for a uarterly annuity use a
uarterly rate, 4
nom
56"
/ote: For an annuity due &i"e", for be7innin7 of the year payments', multiply the future value by
&18interest rate per period'" .he F$s eual $(21"5( and $),(13"11 for examples 3 and *
respectively"
Future Value Lump Sum - Compounding Effects:
0nnual, 9emi:annual, ;uarterly, -onthly, <ee4ly, =aily
)
k
+ (1 * PV =
FVIF
* PV =
FV
T
eff T , k T
eff
Example 10" Find the future value in 5 years of a $100 cash flow if the interest rate euals 10!
compounded uarterly usin7 the effective annual rate to ta4e the compoundin7 effect into
consideration"
Future $alue #resent $alue F$%F&4,.' 4&eff' . >ompoundin7
$63.86 $100 1"(13(1( 10"131)3*
!
5 ;uarterly
Calculator Inputs
n + 5 i + 10"131)3*! #$ + 100 #-. + 0 F$ + ,

m
k
+ 1 * PV =
FVIF
* PV =
FV
nom
m * T
m * T , m k T
nom
5
Example 11" Find the future value in 5 years of a $100 cash flow if the interest rate euals 10!
compounded uarterly usin7 the rate per period to ta4e the compoundin7 effect into
consideration"
Future $alue #resent $alue F$%F&4,.' 4&nom'56 .*m >ompoundin7
$63.86 $100 1"(13(1( )"5! 5*6 ;uarterly
Calculator Inputs
n + )0 i + )"5! #$ + 100 #-. + 0 F$ + ,
>ontinuous
e
* PV =
FV
T k
T
nom

Example 1)" Find the future value in 5 years of a $100 cash flow if the interest rate euals 10!
compounded continuously usin7 the effective annual rate to ta4e the compoundin7 effect into
consideration"
Future $alue #resent $alue F$%F&4,.' 4&eff' . >ompoundin7
$6#.87 $100 1"(632)1 10"5120*)
!
5 >ontinuous
Calculator Inputs
n + 5 i + 10"131)3*! #$ + 100 #-. + 0 F$ + ,
An anal$s%s &' t(e Future Value Annu%t$ )eturn
Example 3 &cont"':
$00 annu%t$ '&r " $ears * 0+,$r
F$ of annuity $(10"51 9ee example 3
?eturn of principal 500"00 #mt * n + 100 * 5
.otal interest 110"51 F$ @ return of principal
?e7ular interest 100"00 #mt * &4
nom
5m' * n&n:1'5) + 100 * 10! * 10
%nterest on interest 10"51 .otal interest @ ?e7ular interest
$00 annu%t$ -ue '&r " $ears * 0+,$r
F$ of annuity $(21"5( 9ee example 3
?eturn of principal 500"00 #mt * n + 100 * 5
.otal interest 121"5( F$ @ return of principal
?e7ular interest 150"00 #mt * &4
nom
5m' * n&n81'5) + 100 * 10! * 15
%nterest on interest )1"5( .otal interest @ ?e7ular interest
Example * &cont"':
$00 annu%t$ '&r 20 .uarters * 2."+,.tr
F$ of annuity $),556"62 9ee example 3
?eturn of principal ),000"00 #mt * n + 100 * )0
.otal interest 556"62 F$ @ return of principal
?e7ular interest 625"00 #mt * &4
nom
5m' * n&n:1'5) + 100 * )"5! * 1*0
%nterest on interest 2*"62 .otal interest @ ?e7ular interest
$00 annu%t$ -ue '&r 20 .uarters * 2."+,.tr
F$ of annuity $),(13"11 9ee example 3
?eturn of principal ),000"00 #mt * n + 100 * )0
.otal interest (13"11 F$ @ return of principal
?e7ular interest 5)5"00 #mt * &4
nom
5m' * n&n81'5) + 100 * )"5! * )10
%nterest on interest *1"11 .otal interest @ ?e7ular interest
/ote: Ase
( )
)
' 1 &
)
1
1 1 ) 1 0 ' 1 &
1

=
+
= + + + + + =

n
for the number
of periods receivin7 simple interest for a re7ular annuity"
/ote: Ase
( )
)
1
1 ) 1
1
+
= + + + + =

=

n

n
for the number of periods receivin7 simple
interest for an annuity due"
An anal$s%s &' t(e Future Value )eturn &' a Lu/0 1u/
Example 10 &cont"':
$00 %n2este- '&r " $ears * 0+,$r 3%t( .uarterl$ 4&/0&un-%n5
F$ $1(1"3( 9ee example 10
?eturn of principal 100"00 #resent value
.otal interest (1"3( F$ @ return of principal
?e7ular interest 50"00 #$ * &4
nom
' * n + 100 * 10! * 5
%nterest on interest 11"3( .otal interest @ ?e7ular interest
Example 11 &cont"':
$00 %n2este- '&r " $ears * 0+,$r 3%t( .uarterl$ 4&/0&un-%n5
F$ $1(1"3( 9ee example 11
?eturn of principal 100"00 #resent value
.otal interest (1"3( F$ @ return of principal
?e7ular interest 50"00 #$ * &4
nom
5m' * &m*n' + 100 * )"5! * )0
%nterest on interest 11"3( .otal interest @ ?e7ular interest
Example 1) &cont"':
$00 %n2este- '&r " $ears * 0+,$r 3%t( 4&nt%nu&us 4&/0&un-%n5
F$ $1(6"32 9ee example 1)
?eturn of principal 100"00 #resent value
.otal interest (6"32 F$ @ return of principal
?e7ular interest 50"00 #$ * &4
nom
' * n + 100 * 10! * 5
%nterest on interest 16"32 .otal interest @ ?e7ular interest
L&an A/&rt%6at%&n 14(e-ule
Example: $10,000, 5 year loan at 10!5year
#ayment euals $),(12 "*2 &i"e", 10000 + #-. * #$%F0
10!, 5
'"
Bear Pa$/ent 7e5. 7alan4e Interest
)e0a$/ent &'
Pr%n4%0al En-. 7alan4e
1 $),(12"*2 $10,000"00 $1,000"00 $1,(12"*2 $3,1()"01
) $),(12"*2 $3,1()"01 $31(")0 $1,301"22 $(,5(0")5
1 $),(12"*2 $(,5(0")5 $(5("01 $1,*31"*5 $6,523"10
6 $),(12"*2 $6,523"10 $652"31 $),130"16 $),1*3"1(
5 $),(12"*2 $),1*3"1( $)1*"3) $),1*3"1( $0"00
+ End Calance
t:1
Ce7 Cal * 4
#ayment :
%nterest
Ce7 Cal @
?epay" #rin"