Future Value Present Value

FV = PV X (1+r)n PV = FV/(1+r)n

IF you use the EXCEL formulas PV, FV, RATE, NPER or PMT, PV and FV must al
FUTURE VALUE EXAMPLE 1
Suppose a stock currently pays a dividend of $1.10, which is expected to grow
year for the next five years.
What will the dividend be in five years?
PV $1.10
r 40%
n 5
FV $5.92 =B12*(1+B13)^B14

FUTURE VALUE EXAMPLE 2

Your salary after graduating from IBU is $100,000 a year.
You expect to get an annual raise of 5% per year. What will your sa

PV $100,000.00
r 0.05
n 20
FV $265,329.77 =B23*(1+B24)^B25
SIMPLE INTEREST VS COMPOUND INTEREST
Your great great great grandparents had $100 to invest for their fu
They had two choices, they could invest in a fund that paid 10% SIM
Or they could invest in a fund that pays 10% COMPOUND Interest (
This was 100 years ago. Calculate the value of the fund today assum
Investment option 1 - simple interest
Future value = principal + principal x interest rate x # of periods
Future Value = $100 + $100 x 0.10 x 100 years
They earned 11x their investment over 100 years

Investment option 2 - Compound interest

FV = PV X (1+r)n $100 x (1+10%)100

PRESENT VALUE EXAMPLE 1

How much would an investor have to set aside today in order to have $20,00
years from now if the current rate is 15 percent?

Rate 15.0%
NPER 5.00
FV $20,000
PV $9,943.53 =C53/(1+C51)^C52

PV = FV/(1+r)n
sent Value Where
= FV/(1+r)n PV = Present Value
FV = Future Value
r = interest or return
n = # of periods

PMT, PV and FV must always be OPPOSITE SIGNS

hich is expected to grow at 40 percent per

In excel, you can also solve with the FV Formulate

Rate 40.0%
nper 5
PMT 0
PV -$1.10
FV $5.92 =FV(G13,G14,G15,G16)

00,000 a year.
r year. What will your salary be in 20 years?
Rate 5.0%
nper 20
PMT
PV -$100,000.00
FV $265,329.77 =FV(G22,G23,G24,G25)

DIRECT FORMULA $265,329.77 =FV(5%,20,0,-100000)

100 to invest for their future great great great grandchildren.
a fund that paid 10% SIMPLE INTEREST (only interest on principal).
% COMPOUND Interest (interest on interest).
of the fund today assuming no withdrawals.

st rate x # of periods
$1,100

$1,378,061 =100*(1+0.1)^100

$1,378,061 =FV(10%,100,0,-100)

in order to have $20,000 five

RATE 15%
NPER 5
PMT
FV $20,000
PV -$9,943.53 =PV(H50,H51,H52,H53)
100000)
H52,H53)
PRESENT VALUE EXAMPLE 2
You plan on buying a small small small condo in Brampton in 10 years.
You figure that the amount you need in 10 years for a downpayment is $90,0
If your can invest and earn 8% a year. How much would you need to invest to

RATE 8.0% RATE

NPER 10 NPER
FV $90,000 PMT
FV
PV $41,687.41 =B8/(1+B6)^B7 PV
PV = FV/(1+r)n
n in 10 years.
wnpayment is $90,000.
ou need to invest today to reach your goal?

8%
10

$90,000
-$41,687.41 =PV(G6,G7,G8,G9)
If we deposit $5,000 today in an account paying 10 percent, how long does it

We can use the formula NPER. PV and FV must be OPPOSITE signs

RATE 10%
PMT
PV -$5,000.00
FV $10,000.00
NPER 7.2725409 =NPER(C5,C6,C7,C8)

Challenge question
How long will it take for you to triple your money if you can earn 12% annual

RATE 12%
PMT 0
PV -$1,000.00
FV $3,000.00
NPER 9.6940354 =NPER(C14,C15,C16,C17)
how long does it take to grow to $10,000?

OPPOSITE signs with this formula.

CHECK $10,000.00 =5000*(1+10%)^7.2725409

earn 12% annually?

Assume the total cost of a college education will be $50,000 wh
in 12 years. You have $5,000 to invest today. What rate of inter
investment to cover the cost of your child’s education?

IN EXCEL, WE CAN USE THE FORMULA RATE. AGAIN, PV AND FV M

NPER 12
PMT 0
PV -$5,000.00
FV $50,000.00
RATE 21.15% =RATE(C9,C10,C11,C12)

Challenge question
You have $100,000 today. You want to retired in 20 years with $1,0
How much do you need to earn annually to achieve your retiremen

NPER 20
PMT
PV -$100,000.00
FV $1,000,000.00
RATE 12.20%
e $50,000 when your child enters college
rate of interest must you earn on your
on?

N, PV AND FV MUST BE OPPOSITE SIGNS

years with $1,000,000.

your retirement goal.
Consider an investment that pays $200 one year from now, with cash flows in
$200 per year through Year 4. If the interest rate is 12 percent, what is the pr
of this stream of cash flows?
If the issuer offers this investment for $1,500, should you purchase it?

0 1 2 3
-$1,500.00 $200.00 $400.00 $600.00

NPV -$67.07 =NPV(0.12,D7:G7)+C7

IN-CLASS QUESTION
You are considering buying a rental building for $1,000,000.
The building is expected to generate $200,000 of cash inflow in the
Each year after that, the cash flows are expected to increase by 5%
The building must be torn down in 8 years to make room for the ne
Is it worth it to invest in this building if the required return is 15%.

STEP 1 - Make a cash flow timeline

0 1 2 3

CF -$1,000,000 $200,000 $210,000 $220,500

=D23*1.05

NPV $34,034.39 =C23+NPV(0.15,D23:K23)

Since NPV is positive, would accept the project.
In the npv excel formula, year zero is not included in the
The npv excel formula, starts at year 1.
ith cash flows increasing by
t, what is the present value

chase it?

4
$800.00

000,000.
ash inflow in the first year.
increase by 5% annually.
room for the new IBU gym.
return is 15%.

4 5 6 7 8

$231,525 $243,101 $255,256 $268,019 $281,420

included in the NPV brackets (it is outside)

For example, if you invest $1,000 for one year at 10 percent interest compou

Rate 5.0% per 6 month period

nper 2
PMT
PV -$1,000.00
FV $1,102.50 =FV(C5,C6,C7,C8)

Note
PP = payments per year
CP = # of times compounded per year

For example, if my rent is monthly

this means are PP = 12
12 PAYMENTS per year

For compounding, 12% annual interest, compounded

annually means interest is added at end of year.
If semi-annual, interest is added twice a year
6% half through the year, and other 6% at the end.
This will actually lead to more interest.

EXAMPLE
You earn 12% compounded annually versus 12% compounded semi-annually
$100,000.00
ANNUAL COMPOUNDING
Semi-annual compounding

Balance
10 percent interest compounded semiannually, your investment will grow to:

PP = 1
CP = 2
Rate = 10%/2 = 5%

ompounded semi-annually. Calcuate your interest earned off of

Interest Ending Bal
$12,000 $112,000
=100000*12% =100000+F29

Opening 6 months 12 months

$100,000 $106,000 $112,360
=(1+12%/2)*F34 =(1+12%/2)*G34
ll grow to:
Most interest rates are stated as APR (for mortgages, credit cards, etc
APR means annual percentage rate, and the rate you would have with

EXAMPLE: Your credit card company states an APR of 20% for the cred
What would be the effective interest rate for the year, Effec
APR
Semi-annually? 20%
Quarterly? 20%
Monthly? 20%
Weekly? 20%
Daily? 20%
Continuously? 20%

For continuous, can just put big number in formula.

credit cards, etc.)
would have with simple interest (i.e., no compounding).

20% for the credit card.

or the year, Effective annual rate (EAR) if we had compounding
Periods r/m EAR EFFECT
2 10.00% 21.00% 21.00% =EFFECT(F7,G7)
4 5.00% 21.55% 21.55% =EFFECT(F8,G8)
12 1.67% 21.94% 21.94% =EFFECT(F9,G9)
52 0.38% 22.09% 22.09% =EFFECT(F10,G10)
365 0.05% 22.13% 22.13% =EFFECT(F11,G11)
100,000 0.00% 22.14% 22.14% =EFFECT(F12,G12)
=(1+H12)^G12-1
where r = rate for the period and m = # of compounding periods per year

formula.
ods per year
PERPETUITY
You are interested in an investment that will pay $10,000 a year in perpetuity
If your required return is 5%, what is the value of this investment today?

C/r $200,000 =10000/0.05

GROWING PERPETUITY

The expected dividend next year is $1.30, and

dividends are expected to grow at 5 percent forever.
If the discount rate is 10 percent, what is the value of
this promised dividend stream?

PV $26.00 =1.3/(10%-5%)
 year in perpetuity aka FOREVER.
tment today?

C
PV 
r g
C Next period dividend
r required return
g constant growth
ANNUITY EXAMPLE 1
If you can afford a $400 monthly car payment, how much car can you afford i
month loans?

RATE 0.5833% =7%/12

NPER 36
PMT -$400.00
FV $0.00
PV $12,954.59 =PV(D5,D6,D7,D8)

GROWING ANNUITY
A defined-benefit retir
40 years and increas
C  
T
 1 g  What is the present v
PV  1    
 1  r  
r g   percent?
 

PMT $20,000
RATE 10.0%
Growth 3.0%
NPER 40
$265,121.57 =C20/(C21-C22)*(1-((1+C22)/(1+C21))^C2
an you afford if interest rates are 7 percent on 36-

RATE, PMT AND NPER must be stated the same (e.g., all monthly)

$12,954.24 =400*(1/0.583333%-(1/(0.5

benefit retirement plan offers to pay $20,000 per year for

and increase the annual payment by 3 percent each year.
e present value at retirement if the discount rate is 10

2)/(1+C21))^C23)
 all monthly)

00*(1/0.583333%-(1/(0.58333%*(1+0.58333%)^36)))

per year for

t each year.
ate is 10
1. An investor who was not as astute as he believed invested $276,500 into a
account is worth $213,600. What was the annual rate of return on this accou

-2.83% =RATE(9,0,-276500,213600)

2. What is the future value of $1,200 invested for 20 years at a rate of 6%?

WITH handwritten formula

With Excel formula

3. Beatrice invests $1,290 in an account that pays 4 percent simple interest. H

have earned over a 5-year period if the interest had been compounded annu

With compound interest $1,569.48

With simple interest $1,548.00
Additional interest due to compounding $21.48

4. Your credit card company charges you 1.42 percent per month. What is the
The questions asks for APR not EAR
APR 17.04% =1.42%*12
EAR 18.44% =EFFECT(D23,12)

5. What is the effective annual rate for an APR of 10.60 percent compounde
6. What is the present value of $1,000 to be received in 12 years invested at

$397.11 -$397.11
=1000/(1+8%)^12

7. Both you and your older brother would like to have $24,500 in 12 years. B
in this class, you feel that you are a more savvy investor than your brother a
an annual return of 11.3 percent compared to your brother's 9.8 percent. H
brother will you have to deposit today?
YOU BROTHER
RATE 11.30% 9.80%
NPER 12 12
PMT 0 0
FV $24,500 $24,500
PV -$6,779.91 -$7,978.81
nvested $276,500 into an account 9 years ago. Today, that
e of return on this account?

00,213600)

years at a rate of 6%?

$3,849 =1200*(1+6%)^20
$3,849 =FV(6%,20,0,-1200)

percent simple interest. How much more could she

been compounded annually?

=1290*(1+0.04)^5 FV = PV X (1+r)n
=1290+1290*0.04*5 PV + PV X rate x time
=E16-E17

nt per month. What is the APR on your credit card?

FECT(D23,12) 18.44% =(1+1.42%)^12-1

0.60 percent compounded quarterly?

FORMULA EXCEL
11.03% =EFFECT(10.6%,4) 11.03% =(1+10.6%/4)^4-1
d in 12 years invested at a rate of 8%?

=PV(8%,12,0,1000)

ve $24,500 in 12 years. Because of your success

estor than your brother and will be able to earn
brother's 9.8 percent. How much less than your

DIFFERENCE

The higher your rate of return, the less you need

to invest today to get the same FV.

-$1,198.89
less you need