The document provides an overview of time value of money concepts including compound and simple interest, present and future value calculations, and annuities. It defines key terms, shows examples of calculations using formulas and tables, and step-by-step solutions to practice problems involving deposits, loans, and determining unknown values. The document aims to help readers understand how to adjust cash flows to a single point in time using interest rates and calculate future and present values.
Present value: The current worth of a future sum of money or stream of cash flows, given a specified rate of return. Future cash flows are "discounted" at the discount rate; the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to valuing future cash flows properly, whether they be earnings or obligations.[2]
Present value of an annuity: An annuity is a series of equal payments or receipts that occur at evenly spaced intervals. Leases and rental payments are examples. The payments or receipts occur at the end of each period for an ordinary annuity while they occur at the beginning of each period for an annuity due.[3]
Present value of a perpetuity is an infinite and constant stream of identical cash flows.[4]
Compound interest (or compounding interest) is interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan. Thought to have originated in 17th-century Italy, compound interest can be thought of as “interest on interest,” and will make a sum grow at a faster rate than simple interest, which is calculated only on the principal amount. The rate at which compound interest accrues depends on the frequency of compounding; the higher the number of compounding periods, the greater the compound interest. Thus, the amount of compound interest accrued on $100 compounded at 10% annually will be lower than that on $100 compounded at 5% semi-annually over the same time period.
Basic Time Value of Money Formula and Example
Depending on the exact situation in question, the TVM formula may change slightly. For example, in the case of annuity or perpetuity payments, the generalized formula has additional or less factors. But in general, the most fundamental TVM formula takes into account the following variables:
FV = Future value of money
PV = Present value of money
i = interest rate
n = number of compounding periods per year
t = number of years
Based on these variables, the formula for TVM is:
FV = PV x (1 + (i / n)) ^ (n x t)
For example, assume a sum of $10,000 is invested for one year at 10% interest. The future value of that money is:
FV = $10,000 x (1 + (10% / 1) ^ (1 x 1) = $11,000
The formula can also be rearranged to find the value of the future sum in present day dollars. For example, the value of $5,000 one year from today, compounded at 7% interest, is:
PV = $5,000 / (1 + (7% / 1) ^ (1 x 1) = $4,673
Present value: The current worth of a future sum of money or stream of cash flows, given a specified rate of return. Future cash flows are "discounted" at the discount rate; the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to valuing future cash flows properly, whether they be earnings or obligations.[2]
Present value of an annuity: An annuity is a series of equal payments or receipts that occur at evenly spaced intervals. Leases and rental payments are examples. The payments or receipts occur at the end of each period for an ordinary annuity while they occur at the beginning of each period for an annuity due.[3]
Present value of a perpetuity is an infinite and constant stream of identical cash flows.[4]
Compound interest (or compounding interest) is interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan. Thought to have originated in 17th-century Italy, compound interest can be thought of as “interest on interest,” and will make a sum grow at a faster rate than simple interest, which is calculated only on the principal amount. The rate at which compound interest accrues depends on the frequency of compounding; the higher the number of compounding periods, the greater the compound interest. Thus, the amount of compound interest accrued on $100 compounded at 10% annually will be lower than that on $100 compounded at 5% semi-annually over the same time period.
Basic Time Value of Money Formula and Example
Depending on the exact situation in question, the TVM formula may change slightly. For example, in the case of annuity or perpetuity payments, the generalized formula has additional or less factors. But in general, the most fundamental TVM formula takes into account the following variables:
FV = Future value of money
PV = Present value of money
i = interest rate
n = number of compounding periods per year
t = number of years
Based on these variables, the formula for TVM is:
FV = PV x (1 + (i / n)) ^ (n x t)
For example, assume a sum of $10,000 is invested for one year at 10% interest. The future value of that money is:
FV = $10,000 x (1 + (10% / 1) ^ (1 x 1) = $11,000
The formula can also be rearranged to find the value of the future sum in present day dollars. For example, the value of $5,000 one year from today, compounded at 7% interest, is:
PV = $5,000 / (1 + (7% / 1) ^ (1 x 1) = $4,673
The time value of money is the concept that money available at the present time is worth more than the identical sum in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. Time Value of Money is also sometimes referred to as present discounted value.
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Discuss the role of time value in finance, the use of computational tools, and the basic patterns of cash flow. Understand the concepts of future value and present value, their calculation for single amounts, and the relationship between them.
Time lines
Future value / Present value of lump sum
FV / PV of annuity
Perpetuities
Uneven CF stream
Compounding periods
Nominal / Effective / Periodic rates
Amortization
This is the third presentation for the University of New England Graduate School of Business unit GSB711 - Managerial Finance. It explores the time value of money, using examples to help students clarify this concept.
The time value of money is the concept that money available at the present time is worth more than the identical sum in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. Time Value of Money is also sometimes referred to as present discounted value.
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Discuss the role of time value in finance, the use of computational tools, and the basic patterns of cash flow. Understand the concepts of future value and present value, their calculation for single amounts, and the relationship between them.
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Future value / Present value of lump sum
FV / PV of annuity
Perpetuities
Uneven CF stream
Compounding periods
Nominal / Effective / Periodic rates
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This is the third presentation for the University of New England Graduate School of Business unit GSB711 - Managerial Finance. It explores the time value of money, using examples to help students clarify this concept.
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Time value slide
1. 3-1
After studying Chapter 3,
you should be able to:
1. Understand what is meant by "the time value of money."
2. Understand the relationship between present and future value.
3. Describe how the interest rate can be used to adjust the value of
cash flows – both forward and backward – to a single point in
time.
4. Calculate both the future and present value of: (a) an amount
invested today; (b) a stream of equal cash flows (an annuity);
and (c) a stream of mixed cash flows.
5. Distinguish between an “ordinary annuity” and an “annuity due.”
6. Use interest factor tables and understand how they provide a
shortcut to calculating present and future values.
7. Use interest factor tables to find an unknown interest rate or
growth rate when the number of time periods and future and
present values are known.
8. Build an “amortization schedule” for an installment-style loan.
2. 3-2
The Time Value of Money
The Interest Rate
Simple Interest
Compound Interest
Amortizing a Loan
Compounding More Than
Once per Year
3. 3-3
Obviously, $10,000 today.
You already recognize that there is
TIME VALUE TO MONEY!!
The Interest Rate
Which would you prefer -- $10,000
today or $10,000 in 5 years?
4. 3-4
TIME allows you the opportunity to
postpone consumption and earn
INTEREST.
Why TIME?
Why is TIME such an important
element in your decision?
5. 3-5
Types of Interest
Compound Interest
Interest paid (earned) on any previous
interest earned, as well as on the
principal borrowed (lent).
Simple Interest
Interest paid (earned) on only the original
amount, or principal, borrowed (lent).
6. 3-6
Simple Interest Formula
Formula SI = P0(i)(n)
SI: Simple Interest
P0: Deposit today (t=0)
i: Interest Rate per Period
n: Number of Time Periods
7. 3-7
SI = P0(i)(n)
= $1,000(.07)(2)
= $140
Simple Interest Example
Assume that you deposit $1,000 in an
account earning 7% simple interest for
2 years. What is the accumulated
interest at the end of the 2nd year?
8. 3-8
FV = P0 + SI
= $1,000 + $140
= $1,140
Future Value is the value at some future
time of a present amount of money, or a
series of payments, evaluated at a given
interest rate.
Simple Interest (FV)
What is the Future Value (FV) of the
deposit?
9. 3-9
The Present Value is simply the
$1,000 you originally deposited.
That is the value today!
Present Value is the current value of a
future amount of money, or a series of
payments, evaluated at a given interest
rate.
Simple Interest (PV)
What is the Present Value (PV) of the
previous problem?
11. 3-11
Assume that you deposit $1,000 at
a compound interest rate of 7% for
2 years.
Future Value
Single Deposit (Graphic)
0 1 2
$1,000
FV2
7%
12. 3-12
FV1 = P0 (1+i)1 = $1,000 (1.07)
= $1,070
Compound Interest
You earned $70 interest on your $1,000
deposit over the first year.
This is the same amount of interest you
would earn under simple interest.
Future Value
Single Deposit (Formula)
13. 3-13
FV1 = P0 (1+i)1 = $1,000 (1.07)
= $1,070
FV2 = FV1 (1+i)1
= P0 (1+i)(1+i) = $1,000(1.07)(1.07)
= P0 (1+i)2 = $1,000(1.07)2
= $1,144.90
You earned an EXTRA $4.90 in Year 2 with
compound over simple interest.
Future Value
Single Deposit (Formula)
14. 3-14
FV1 = P0(1+i)1
FV2 = P0(1+i)2
General Future Value Formula:
FVn = P0 (1+i)n
or FVn = P0 (FVIFi,n) -- See Table I
General Future
Value Formula
etc.
15. 3-15
FVIFi,n is found on Table I
at the end of the book.
Valuation Using Table I
Period 6% 7% 8%
1 1.060 1.070 1.080
2 1.124 1.145 1.166
3 1.191 1.225 1.260
4 1.262 1.311 1.360
5 1.338 1.403 1.469
17. 3-17
TVM on the Calculator
Use the highlighted row
of keys for solving any
of the FV, PV, FVA,
PVA, FVAD, and PVAD
problems
N: Number of periods
I/Y:Interest rate per period
PV: Present value
PMT: Payment per period
FV: Future value
CLR TVM: Clears all of the inputs
into the above TVM keys
18. 3-18
Using The TI BAII+ Calculator
N I/Y PV PMT FV
Inputs
Compute
Focus on 3rd Row of keys (will be
displayed in slides as shown above)
20. 3-20
N: 2 Periods (enter as 2)
I/Y: 7% interest rate per period (enter as 7 NOT .07)
PV: $1,000 (enter as negative as you have “less”)
PMT: Not relevant in this situation (enter as 0)
FV: Compute (Resulting answer is positive)
Solving the FV Problem
N I/Y PV PMT FV
Inputs
Compute
2 7 -1,000 0
1,144.90
21. 3-21
Julie Miller wants to know how large her deposit
of $10,000 today will become at a compound
annual interest rate of 10% for 5 years.
Story Problem Example
0 1 2 3 4 5
$10,000
FV5
10%
22. 3-22
Calculation based on Table I:
FV5 = $10,000 (FVIF10%, 5)
= $10,000 (1.611)
= $16,110 [Due to Rounding]
Story Problem Solution
Calculation based on general formula:
FVn = P0 (1+i)n
FV5 = $10,000 (1+ 0.10)5
= $16,105.10
23. 3-23
Entering the FV Problem
Press:
2nd CLR TVM
5 N
10 I/Y
-10000 PV
0 PMT
CPT FV
24. 3-24
The result indicates that a $10,000
investment that earns 10% annually
for 5 years will result in a future value
of $16,105.10.
Solving the FV Problem
N I/Y PV PMT FV
Inputs
Compute
5 10 -10,000 0
16,105.10
25. 3-25
We will use the “Rule-of-72”.
Double Your Money!!!
Quick! How long does it take to
double $5,000 at a compound rate
of 12% per year (approx.)?
26. 3-26
Approx. Years to Double = 72 / i%
72 / 12% = 6 Years
[Actual Time is 6.12 Years]
The “Rule-of-72”
Quick! How long does it take to
double $5,000 at a compound rate
of 12% per year (approx.)?
27. 3-27
The result indicates that a $1,000
investment that earns 12% annually
will double to $2,000 in 6.12 years.
Note: 72/12% = approx. 6 years
Solving the Period Problem
N I/Y PV PMT FV
Inputs
Compute
12 -1,000 0 +2,000
6.12 years
28. 3-28
Assume that you need $1,000 in 2 years.
Let’s examine the process to determine
how much you need to deposit today at a
discount rate of 7% compounded annually.
0 1 2
$1,000
7%
PV1
PV0
Present Value
Single Deposit (Graphic)
30. 3-30
PV0 = FV1 / (1+i)1
PV0 = FV2 / (1+i)2
General Present Value Formula:
PV0 = FVn / (1+i)n
or PV0 = FVn (PVIFi,n) -- See Table II
General Present
Value Formula
etc.
31. 3-31
PVIFi,n is found on Table II
at the end of the book.
Valuation Using Table II
Period 6% 7% 8%
1 .943 .935 .926
2 .890 .873 .857
3 .840 .816 .794
4 .792 .763 .735
5 .747 .713 .681
33. 3-33
N: 2 Periods (enter as 2)
I/Y: 7% interest rate per period (enter as 7 NOT .07)
PV: Compute (Resulting answer is negative “deposit”)
PMT: Not relevant in this situation (enter as 0)
FV: $1,000 (enter as positive as you “receive $”)
Solving the PV Problem
N I/Y PV PMT FV
Inputs
Compute
2 7 0 +1,000
-873.44
34. 3-34
Julie Miller wants to know how large of a
deposit to make so that the money will
grow to $10,000 in 5 years at a discount
rate of 10%.
Story Problem Example
0 1 2 3 4 5
$10,000
PV0
10%
35. 3-35
Calculation based on general formula:
PV0 = FVn / (1+i)n
PV0 = $10,000 / (1+ 0.10)5
= $6,209.21
Calculation based on Table I:
PV0 = $10,000 (PVIF10%, 5)
= $10,000 (.621)
= $6,210.00 [Due to Rounding]
Story Problem Solution
36. 3-36
Solving the PV Problem
N I/Y PV PMT FV
Inputs
Compute
5 10 0 +10,000
-6,209.21
The result indicates that a $10,000
future value that will earn 10% annually
for 5 years requires a $6,209.21 deposit
today (present value).
37. 3-37
Types of Annuities
Ordinary Annuity: Payments or receipts
occur at the end of each period.
Annuity Due: Payments or receipts
occur at the beginning of each period.
An Annuity represents a series of equal
payments (or receipts) occurring over a
specified number of equidistant periods.
39. 3-39
Parts of an Annuity
0 1 2 3
$100 $100 $100
(Ordinary Annuity)
End of
Period 1
End of
Period 2
Today Equal Cash Flows
Each 1 Period Apart
End of
Period 3
40. 3-40
Parts of an Annuity
0 1 2 3
$100 $100 $100
(Annuity Due)
Beginning of
Period 1
Beginning of
Period 2
Today Equal Cash Flows
Each 1 Period Apart
Beginning of
Period 3
41. 3-41
FVAn = R(1+i)n-1 + R(1+i)n-2 +
... + R(1+i)1 + R(1+i)0
Overview of an
Ordinary Annuity -- FVA
R R R
0 1 2 n n+1
FVAn
R = Periodic
Cash Flow
Cash flows occur at the end of the period
i% . . .
42. 3-42
FVA3 = $1,000(1.07)2 +
$1,000(1.07)1 + $1,000(1.07)0
= $1,145 + $1,070 + $1,000
= $3,215
Example of an
Ordinary Annuity -- FVA
$1,000 $1,000 $1,000
0 1 2 3 4
$3,215 = FVA3
7%
$1,070
$1,145
Cash flows occur at the end of the period
43. 3-43
Hint on Annuity Valuation
The future value of an ordinary
annuity can be viewed as
occurring at the end of the last
cash flow period, whereas the
future value of an annuity due
can be viewed as occurring at
the beginning of the last cash
flow period.
45. 3-45
N: 3 Periods (enter as 3 year-end deposits)
I/Y: 7% interest rate per period (enter as 7 NOT .07)
PV: Not relevant in this situation (no beg value)
PMT: $1,000 (negative as you deposit annually)
FV: Compute (Resulting answer is positive)
Solving the FVA Problem
N I/Y PV PMT FV
Inputs
Compute
3 7 0 -1,000
3,214.90
46. 3-46
FVADn = R(1+i)n + R(1+i)n-1 +
... + R(1+i)2 + R(1+i)1
= FVAn (1+i)
Overview View of an
Annuity Due -- FVAD
R R R R R
0 1 2 3 n-1 n
FVADn
i% . . .
Cash flows occur at the beginning of the period
47. 3-47
FVAD3 = $1,000(1.07)3 +
$1,000(1.07)2 + $1,000(1.07)1
= $1,225 + $1,145 + $1,070
= $3,440
Example of an
Annuity Due -- FVAD
$1,000 $1,000 $1,000 $1,070
0 1 2 3 4
$3,440 = FVAD3
7%
$1,225
$1,145
Cash flows occur at the beginning of the period
49. 3-49
Solving the FVAD Problem
N I/Y PV PMT FV
Inputs
Compute
3 7 0 -1,000
3,439.94
Complete the problem the same as an “ordinary annuity”
problem, except you must change the calculator setting
to “BGN” first. Don’t forget to change back!
Step 1: Press 2nd BGN keys
Step 2: Press 2nd SET keys
Step 3: Press 2nd QUIT keys
50. 3-50
PVAn = R/(1+i)1 + R/(1+i)2
+ ... + R/(1+i)n
Overview of an
Ordinary Annuity -- PVA
R R R
0 1 2 n n+1
PVAn
R = Periodic
Cash Flow
i% . . .
Cash flows occur at the end of the period
51. 3-51
PVA3 = $1,000/(1.07)1 +
$1,000/(1.07)2 +
$1,000/(1.07)3
= $934.58 + $873.44 + $816.30
= $2,624.32
Example of an
Ordinary Annuity -- PVA
$1,000 $1,000 $1,000
0 1 2 3 4
$2,624.32 = PVA3
7%
$934.58
$873.44
$816.30
Cash flows occur at the end of the period
52. 3-52
Hint on Annuity Valuation
The present value of an ordinary
annuity can be viewed as
occurring at the beginning of the
first cash flow period, whereas
the future value of an annuity
due can be viewed as occurring
at the end of the first cash flow
period.
54. 3-54
N: 3 Periods (enter as 3 year-end deposits)
I/Y: 7% interest rate per period (enter as 7 NOT .07)
PV: Compute (Resulting answer is positive)
PMT: $1,000 (negative as you deposit annually)
FV: Not relevant in this situation (no ending value)
Solving the PVA Problem
N I/Y PV PMT FV
Inputs
Compute
3 7 -1,000 0
2,624.32
55. 3-55
PVADn = R/(1+i)0 + R/(1+i)1 + ... + R/(1+i)n-1
= PVAn (1+i)
Overview of an
Annuity Due -- PVAD
R R R R
0 1 2 n-1 n
PVADn
R: Periodic
Cash Flow
i% . . .
Cash flows occur at the beginning of the period
56. 3-56
PVADn = $1,000/(1.07)0 + $1,000/(1.07)1 +
$1,000/(1.07)2 = $2,808.02
Example of an
Annuity Due -- PVAD
$1,000.00 $1,000 $1,000
0 1 2 3 4
$2,808.02 = PVADn
7%
$ 934.58
$ 873.44
Cash flows occur at the beginning of the period
58. 3-58
Solving the PVAD Problem
N I/Y PV PMT FV
Inputs
Compute
3 7 -1,000 0
2,808.02
Complete the problem the same as an “ordinary annuity”
problem, except you must change the calculator setting
to “BGN” first. Don’t forget to change back!
Step 1: Press 2nd BGN keys
Step 2: Press 2nd SET keys
Step 3: Press 2nd QUIT keys
59. 3-59
1. Read problem thoroughly
2. Create a time line
3. Put cash flows and arrows on time line
4. Determine if it is a PV or FV problem
5. Determine if solution involves a single
CF, annuity stream(s), or mixed flow
6. Solve the problem
7. Check with financial calculator (optional)
Steps to Solve Time Value
of Money Problems
60. 3-60
Julie Miller will receive the set of cash
flows below. What is the Present Value
at a discount rate of 10%.
Mixed Flows Example
0 1 2 3 4 5
$600 $600 $400 $400 $100
PV0
10%
61. 3-61
1. Solve a “piece-at-a-time” by
discounting each piece back to t=0.
2. Solve a “group-at-a-time” by first
breaking problem into groups of
annuity streams and any single
cash flow groups. Then discount
each group back to t=0.
How to Solve?
65. 3-65
Use the highlighted
key for starting the
process of solving a
mixed cash flow
problem
Press the CF key
and down arrow key
through a few of the
keys as you look at
the definitions on
the next slide
Solving the Mixed Flows
Problem using CF Registry
66. 3-66
Defining the calculator variables:
For CF0: This is ALWAYS the cash flow occurring
at time t=0 (usually 0 for these problems)
For Cnn:* This is the cash flow SIZE of the nth
group of cash flows. Note that a “group” may only
contain a single cash flow (e.g., $351.76).
For Fnn:* This is the cash flow FREQUENCY of the
nth group of cash flows. Note that this is always a
positive whole number (e.g., 1, 2, 20, etc.).
Solving the Mixed Flows
Problem using CF Registry
* nn represents the nth cash flow or frequency. Thus, the
first cash flow is C01, while the tenth cash flow is C10.
67. 3-67
Solving the Mixed Flows
Problem using CF Registry
Steps in the Process
Step 1: Press CF key
Step 2: Press 2nd CLR Work keys
Step 3: For CF0 Press 0 Enter ↓ keys
Step 4: For C01 Press 600 Enter ↓ keys
Step 5: For F01 Press 2 Enter ↓ keys
Step 6: For C02 Press 400 Enter ↓ keys
Step 7: For F02 Press 2 Enter ↓ keys
68. 3-68
Solving the Mixed Flows
Problem using CF Registry
Steps in the Process
Step 8: For C03 Press 100 Enter ↓ keys
Step 9: For F03 Press 1 Enter ↓ keys
Step 10: Press ↓ ↓ keys
Step 11: Press NPV key
Step 12: For I=, Enter 10 Enter ↓ keys
Step 13: Press CPT key
Result: Present Value = $1,677.15
69. 3-69
General Formula:
FVn = PV0(1 + [i/m])mn
n: Number of Years
m: Compounding Periods per Year
i: Annual Interest Rate
FVn,m: FV at the end of Year n
PV0: PV of the Cash Flow today
Frequency of
Compounding
70. 3-70
Julie Miller has $1,000 to invest for 2
Years at an annual interest rate of
12%.
Annual FV2 = 1,000(1+ [.12/1])(1)(2)
= 1,254.40
Semi FV2 = 1,000(1+ [.12/2])(2)(2)
= 1,262.48
Impact of Frequency
72. 3-72
The result indicates that a $1,000
investment that earns a 12% annual
rate compounded quarterly for 2 years
will earn a future value of $1,266.77.
Solving the Frequency
Problem (Quarterly)
N I/Y PV PMT FV
Inputs
Compute
2(4) 12/4 -1,000 0
1266.77
74. 3-74
The result indicates that a $1,000
investment that earns a 12% annual
rate compounded daily for 2 years will
earn a future value of $1,271.20.
Solving the Frequency
Problem (Daily)
N I/Y PV PMT FV
Inputs
Compute
2(365) 12/365 -1,000 0
1271.20
76. 3-76
Effective Annual Interest Rate
The actual rate of interest earned
(paid) after adjusting the nominal
rate for factors such as the number
of compounding periods per year.
(1 + [ i / m ] )m - 1
Effective Annual
Interest Rate
77. 3-77
Basket Wonders (BW) has a $1,000
CD at the bank. The interest rate
is 6% compounded quarterly for 1
year. What is the Effective Annual
Interest Rate (EAR)?
EAR = ( 1 + 6% / 4 )4 - 1
= 1.0614 - 1 = .0614 or 6.14%!
BWs Effective
Annual Interest Rate
79. 3-79
1. Calculate the payment per period.
2. Determine the interest in Period t.
(Loan Balance at t-1) x (i% / m)
3. Compute principal payment in Period t.
(Payment - Interest from Step 2)
4. Determine ending balance in Period t.
(Balance - principal payment from Step 3)
5. Start again at Step 2 and repeat.
Steps to Amortizing a Loan
80. 3-80
Julie Miller is borrowing $10,000 at a
compound annual interest rate of 12%.
Amortize the loan if annual payments are
made for 5 years.
Step 1: Payment
PV0 = R (PVIFA i%,n)
$10,000 = R (PVIFA 12%,5)
$10,000 = R (3.605)
R = $10,000 / 3.605 = $2,774
Amortizing a Loan Example
81. 3-81
Amortizing a Loan Example
End of
Year
Payment Interest Principal Ending
Balance
0 --- --- --- $10,000
1 $2,774 $1,200 $1,574 8,426
2 2,774 1,011 1,763 6,663
3 2,774 800 1,974 4,689
4 2,774 563 2,211 2,478
5 2,775 297 2,478 0
$13,871 $3,871 $10,000
[Last Payment Slightly Higher Due to Rounding]
82. 3-82
The result indicates that a $10,000 loan
that costs 12% annually for 5 years and
will be completely paid off at that time
will require $2,774.10 annual payments.
Solving for the Payment
N I/Y PV PMT FV
Inputs
Compute
5 12 10,000 0
-2774.10
83. 3-83
Using the Amortization
Functions of the Calculator
Press:
2nd Amort
1 ENTER
1 ENTER
Results:
BAL = 8,425.90* ↓
PRN = -1,574.10* ↓
INT = -1,200.00* ↓
Year 1 information only
*Note: Compare to 3-82
84. 3-84
Using the Amortization
Functions of the Calculator
Press:
2nd Amort
2 ENTER
2 ENTER
Results:
BAL = 6,662.91* ↓
PRN = -1,763.99* ↓
INT = -1,011.11* ↓
Year 2 information only
*Note: Compare to 3-82
85. 3-85
Using the Amortization
Functions of the Calculator
Press:
2nd Amort
1 ENTER
5 ENTER
Results:
BAL = 0.00 ↓
PRN =-10,000.00 ↓
INT = -3,870.49 ↓
Entire 5 Years of loan information
(see the total line of 3-82)
86. 3-86
Usefulness of Amortization
2. Calculate Debt Outstanding --
The quantity of outstanding
debt may be used in financing
the day-to-day activities of the
firm.
1. Determine Interest Expense --
Interest expenses may reduce
taxable income of the firm.