BACK TO THE FUTURE THE TIME VALUE OF MONEY

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

Future Value Computation Beginning of Year End of Year Investmentx$1,000=$1,0001 Incomex$1,000=.0880 _____ $1, x$1,000=$1, x$1,080=$1,166 (1 + Interest Rate) xInvestment= Future Value = (1 + int) x Present Value PV x (1 + int) 2 End of year 1 = Future Value End of year 2 PV x (1 + int) n = Future Value Number of Payment Periods 1 = 100%

FUTURE VALUE

Future Value Computation Beginning of Year End of Year Investment x $100,000 =$100,0001 Income x $100,000=.088,000 _______ $108, x$100,000=$108, x $108,000 =$116,640 FUTURE VALUE

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

Click on the “Download now!” button

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

Click the ‘Insert Function’ (f x ) icon OpenOffice.org calc FUTURE VALUE

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

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

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

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

Positive and Negative Numbers

Future Value Computation Beginning of Year End of Year Investment x $100,000 =$100,0001 Income x $100,000=.088,000 _______ $108,000 Investment + $100,000 =$208,000 Income x $208,000=.0816,640 _______ $224,640 Future Value of a Steam of Payments

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

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

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

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

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

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

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

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

Present Value Computation Beginning of Year End of Year Investment / $100,000 =$92, Investment / $100,000 =$85, Investment / $100,000 =$79, Present Value of a Stream of Payments

Present Value Computation Beginning of Year End of Year Investment / $100,000 =$92, Investment / $100,000 =$85, Investment / $100,000 =$79, $257,710 ________ Present Value of a Stream of Payments

Click on function icon (f x ) Type ‘pv’ (present value) Click on ‘OK’ OpenOffice.org calc

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

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

Four Practice Problems

Future Value of a Lump Sum OpenOffice.org calc

Future Value of a Stream of Payments OpenOffice.org calc

Present Value of a Stream of Payments OpenOffice.org calc

Present Value of a Future Lump Sum OpenOffice.org calc