Chapter 5 566614607.

xls

Atrill/Hurley
Financial Management for Decision Makers
Canadian Edition
Chapter 5
General Excel Template

Topic: Time Value of Money (TVM)

Calculating Future Value and Present Value

Introduction:
We often hear people say "time is money." What this age-old saying implies is
that the passage of time has a measurable impact of the value of money. When
making financial decisions, being able to accurately determine and manage this
impact is essential.

In Excel, all TVM calculations use some combination of the following variables:

PV—Present Value
The current value of a lump-sum future value or a series of future payments,
given a constant interest rate.
FV—Future Value
The accumulated value of a lump-sum current value or a series of periodic,
constant payments, given a constant interest rate.
Rate
The measured interest rate per period.
Nper
The total number of payment periods separating the present value and the future
value of the annuity.
Pmt
A constant (unchanging over the lifetime of the annuity) cash flow that occurs at
the same time during each period of the annuity.
Type
This variable determines when the payments occur during the period. Enter '0'
for the end of the period, or '1' for the beginning of the period.

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Chapter 5 566614607.xls

(a) Time Value of Money Calculations Involving Lump-Sum Cash Flows

(i) PV
=pv(rate,nper,pmt,fv,type)
How much would $25,000 to be received in 8 years at a discount rate of 4%
(compounded annually) be worth now?
rate 4.00% The per-period interest rate (in this example,
the annual interest rate).
nper 8 The number of periods (in this example, the
number of years between now and when the
$25,000 will be received).
pmt $0.00 Since this is a lump-sum investment, there is
no payment (no re-occurring cash flow).
cpt pv -$18,267.26 =PV(4%,8,0,25000,) The arguments in the
PV function can either be entered as shown or
cell referenced (as is done in cell C35). The
negative result shown indicates that Excel has
interpreted the positive FV entry as a cash
inflow and therefore returned a balancing cash
outflow as a present value (represented by the
negative PV value). The sign of the present
value can be changed by making the future
value entry a cash outflow (negative).

fv $25,000.00 The future amount that is being discounted

back to today.
type – With no payment (pmt) amount, there is no
need to determine a type.

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Chapter 5 566614607.xls

(ii) FV
=fv(rate,nper,pmt,pv,type)
How much would $19,000 be worth in 6 years at an interest rate of 8%
(compounded annually)?
rate 8.00% The per period interest rate (in this example,
the annual interest rate).
nper 6 The number of periods (in this example, the
number of years).
pmt $0.00 Since this is a lump-sum investment, there is
no payment (no re-occurring cash flow).
pv $19,000.00 The current amount that is being compounded
into the future.
cpt fv -$30,150.61

=FV(8%,6,0,19000,) The arguments in the

FV function can either be entered as shown or
cell referenced (as is done in cell C46). The
negative result shown indicates that Excel has
interpreted the positive PV entry as a cash
inflow and therefore returned a balancing cash
outflow as a future value (represented by the
negative FV value). The sign of the future
value can be changed by making the present
value entry a cash outflow (negative).
type – With no payment (pmt) amount, there is no
need to determine a type.

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Chapter 5 566614607.xls

(b) Time Value of Money Calculations Involving Payments (Annuities)

(i) PV
=pv(rate,nper,pmt,fv,type)
Suppose a $500 payment was made into an account at the end of each year for
25 years. How much would the account be worth now at a discount rate of 5%
(compounded annually)?
rate 5.00% The per period interest rate (in this example
the annual interest rate).
nper 25 The number of periods (in this example, the
number of years over which the payments are
being made).
pmt $500.00 The amount of the re-occurring cash flow
(payment).
cpt pv -$7,046.97
=PV(5%,25,500,,0) The arguments in the PV
function can either be entered as shown or cell
referenced (as is done in cell C57). The
negative result shown indicates that Excel has
interpreted the positive PMT value as a cash
inflow and therefore returned a balancing cash
outflow as a present value (represented by the
negative PV value). The sign of the present
value can be changed by making the
payments value entry a cash outflow
(negative).
fv $0.00 There is no separate future value in this
example, all the cash flows are considered
payments (pmt).
type 0
Since the payments are being made at the end
of each year (period), this is a type 0 annuity
(also referred to as an ordinary annuity).

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(ii) FV
=fv(rate,nper,pmt,pv,type)
Suppose a $200 payment is made at the beginning of each year into an account
that earns 4% (compounded annually). How much will the account be worth in 10
years time? Assume the payments begin immediately.
rate 4.00% The per period interest rate (in this example,
the annual interest rate).
nper 10 The number of periods (in this example, the
number of years over which the payments are
occurring).
pmt $200.00 The amount of the re-occurring cash flow
(payment).
pv $0.00 There is no separate present value in this
example, all the cash flows are considered
payments (pmt).
cpt fv -$2,497.27

=FV(8%,6,0,19000,) The arguments in the

FV function can either be entered as shown or
cell referenced (as is done is cell C68). The
negative result shown indicates that Excel has
interpreted the positive PMT value as a cash
inflow and therefore returned a balancing cash
outflow as a future value (represented by the
negative FV value). The sign of the future
value can be changed by making the payment
value entry a cash outflow (negative).
type 1 Since the payments begin immediately and
are being made at the beginning of each year
(period), this is a type 1 annuity (also referred
to as an annuity due).

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(c) Dealing with Non-Annual Compounding

(i) PV
=pv(rate,nper,pmt,fv,type)
How much would $25,000 to be received in 8 years at a discount rate of 12%
(compounded monthly) be worth now?
rate 1.00% To convert the given annual interest rate into
the correct per-period interest rate, the annual
interest rate needs to be divided by 12 (the
number of months in a year). [12% / 12]
To convert the given number of years into the
nper 96 correct number of periods, the number of
years needs to be multiplied by 12 (the
number of months in a year). [8 × 12]
pmt $0.00 Since this is a lump-sum investment, there is
no payment (no re-occurring cash flow).
cpt pv -$9,618.07
=PV(12%/12,8*12,,25000,) The arguments in
the PV function can either be entered as
shown or cell referenced (as is done is cell
C79). The negative result shown indicates that
Excel has interpreted the positive FV entry as
a cash inflow and therefore returned a
balancing cash outflow as a present value
(represented by the negative PV value). The
sign of the present value can be changed by
making the future value entry a cash outflow
(negative).
fv $25,000.00 The future amount that is being discounted
back to today.
type – With no payment (pmt) amount, there is no
need to determine a type.

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(ii) FV
=fv(rate,nper,pmt,pv,type)
How much would $19,000 be worth in 6 years at an interest rate of 8%
(compounded quarterly)?
rate 2.00% To convert the given annual interest rate into
the correct per-period interest rate, the annual
interest rate needs to be divided by four (the
number of quarters in a year). [8% / 4]
nper 24 To convert the given number of years into the
correct number of periods, the number of
years needs to be multiplied by four (the
number of quarters in a year). [6 × 4]
pmt $0.00 Since this is a lump-sum investment, there is
no payment (no re-occurring cash flow).
pv $19,000.00 The current amount that is being compounded
into the future.
cpt fv -$30,560.31

=FV(8%/4,6*4,,19000,) The arguments in the

FV function can either be entered as shown or
cell referenced (as is done is cell C90). The
negative result shown indicates that Excel has
interpreted the positive PV entry as a cash
inflow and therefore returned a balancing cash
outflow as a future value (represented by the
negative FV value). The sign of the future
value can be changed by making the present
value entry a cash outflow (negative).
type -- With no payment (pmt) amount, there is no
need to determine a type.

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(d) Application Section - Registered Retirement Savings Plans (RRSPs)

(i) Suppose you decide to make monthly contributions of $125 into a RRSP that
pays 9% compounded monthly. If you already have $2,000 saved in the account
and make the first monthly contribution immediately, how large will your RRSP
account be in 25 years?

rate 0.75% To convert the given annual interest rate into

the correct per-period interest rate, the annual
interest rate needs to be divided by 12 (the
number of months in a year). [9% / 12]
nper 300 To convert the given number of years into the
correct number of periods, the number of
years needs to be multiplied by 12 (the
number of months in a year). [25 × 12]
pmt -$125.00 The amount of the re-occurring cash flow
(payment).
pv -$2,000.00 The amount that you have already saved in
the account is the current value (or present
value) of the account.
cpt fv $160,008.12

=FV(9%/12,25*12,-125,-2000,1) The
arguments in the FV function can either be
entered as shown or cell referenced (as is
done in cell C101). The positive result shown
indicates that Excel has interpreted the
negative PV and PMT values as a cash
outflow and therefore returned a balancing
cash inflow as a future value (represented by
the positive FV value). The sign of the future
value could be changed by making the PV and
PMT value entries a cash inflow (positive).
type 1 Since the payments begin immediately, this is
a type 1 annuity.

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(ii) You want to have saved $500,000 by the time you retire in 30 years. How
much do you have to save (and deposit) by the end of each month if you can
earn a 10% annual return on your RRSP?

rate 0.83% To convert the given annual interest rate into

the correct per-period interest rate, the annual
interest rate needs to be divided by 12 (the
number of months in a year). [10% / 12]
nper 360 To convert the given number of years into the
correct number of periods, the number of
years needs to be multiplied by 12 (the
number of months in a year). [30 × 12]
cpt pmt $221.19
=PMT(10%/12,30*12,,-500000,0) The
arguments in the PMT function can either be
entered as shown or cell referenced (as is
done in cell C108). The positive result shown
indicates that Excel has interpreted the
negative FV value as a cash outflow and
therefore returned a balancing cash inflow for
the payment (represented by the positive PMT
value). The sign of the PMT value could be
changed by making the FV value a cash inflow
(positive).
pv $0.00 Since there is no original amount of savings in
the account, the current value (interpreted as
present value) is zero.
fv -$500,000.00 The desired amount of compounded savings
in 30 years time represents the future value of
the annuity.
type 0 Since the payments are being made at the end
of each period, this is a type 0 annuity.

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