Copyright © 2015 by the McGraw-Hill Education (Asia). All rights reserved.

Key Concepts and Skills

Be able to compute the future value of
multiple cash flows
Be able to compute the present value of
multiple cash flows
Be able to compute loan payments
Be able to find the interest rate on a loan
Understand how loans are amortized or paid
off
Understand how interest rates are quoted
5-2
Chapter Outline
5.1 Future and Present Values of
Multiple Cash Flows
5.2 Valuing Level Cash Flows:
Annuities and Perpetuities
5.3 Comparing Rates: The Effect of
Compounding Periods
5.4 Loan Types and Loan Amortization

5-3
Multiple Cash Flows
Computational Methods
TVM Formulas
Texas Instruments BA II+
PV/FV keys
Cash Flow Worksheet
Present Value only

Excel Spreadsheet/Functions

5-4
Future Value: Multiple Cash Flows Example
5.1
You think you will be able to deposit $4,000 at the end
of each of the next three years in a bank account
paying 8 percent interest.
You currently have $7,000 in the account.
How much will you have in 3 years?
How much in 4 years?

5-5
Future Value: Multiple Cash Flows
Example 5.1 - Formulas
Find the value at year 3 of each cash flow and add
them together.
Year 0: FV = $7,000(1.08)3 = $ 8,817.98
Year 1: FV = $4,000(1.08)2 = $ 4,665.60
Year 2: FV = $4,000(1.08)1 = $ 4,320.00
Year 3: value = $ 4,000.00
Total value in 3 years = $21,803.58

Value at year 4 = $21,803.58(1.08) = $23,547.87

5-6

Calculator and Excel Solution

Future Value: Multiple Cash Flows Example
5.2
If you deposit $100 in one year, $200 in two years
and $300 in three years.
How much will you have in three years at 7
percent interest?
How much in five years if you don’t add additional
amounts?
 Year 1 CF: 2 N; -100 PV; 7 I/Y; CPT FV = 114.49
 Year 2 CF: 1 N; -200 PV; 7 I/Y; CPT FV = 214.00
 Year 3 CF: 0 N; -300 PV; 7 I/Y; CPT FV = 300.00
 Total FV = 628.49
3
 Total FV = 628.49 * (1.07)2 = 719.56
5

5-7
Future Value: Multiple Uneven Cash Flows
Example 5.2 – Formulas & Time Line
TIMELINE

0 1 2 3 4 5
7%

-$100.00 -$200.00 -$300.00

$300.00

200*(1.07) = $214.00

100*(1.07)^2 = $114.49

$628.49
Total interest = $628.49-600=28.49
* (1.07)^2 = $719.56

5-8
Future Value: Multiple Cash Flows
Example 5.2
Rate 7%
Year Nper CF FV Function
1 2 -100 $114.49 =FV(0.07,2,0,-100)
2 1 -200 $214.00 =FV(0.07,1,0,-200)
3 0 -300 $300.00 =FV(0.07,0,0,-300)

Total FV at Year 3 $628.49

Total FV at Year 5 $719.56 =(628.49)*(1.07)^2

5-9
Future Value: Multiple Cash Flows
Example
Suppose you invest $500 in a mutual fund today
and $600 in one year.
If the fund pays 9% annually, how much will you
have in two years?

FV = $ 500 x (1.09)2 = $ 594.05

+ $ 600 x (1.09) = $ 654.00
= $1,248.05

5-10
Example Continued
How much will you have in 5 years if you make no
further deposits?
First way:
 FV = $500(1.09)5 + $600(1.09)4 = $1,616.26
Second way – use value at year 2:
 FV = $1,248.05(1.09)3 = $1,616.26

5-11

Calculator and Excel Solution

Future Value: Multiple Cash Flows
Example 3 - Formula
Suppose you plan to deposit $100 into an account
in one year and $300 into the account in three
years.
How much will be in the account in five years if
the interest rate is 8%?

FV = $100(1.08)4 + $300(1.08)2 = $136.05 + $349.92 =

$485.97

5-12

Calculator and Excel Solution

0 1 2 3 4 5

$100 $300
X (1.08)2 =
$349.92

X (1.08)4 = $136.05
$485.97

5-13
Present Value: Multiple Cash Flows
Example 5.3

You are offered an investment that will pay

$200 in year 1,
$400 the next year,

$600 the following year, and

$800 at the end of the 4th year.

You can earn 12% on similar investments.

What is the most you should pay for this one?

5-14
Present Value: Multiple Cash Flows
Example 5.3 - Formula

Find the PV of each cash flow and add them:

Year 1 CF: $200 / (1.12)1 = $ 178.57
Year 2 CF: $400 / (1.12)2 = $ 318.88
Year 3 CF: $600 / (1.12)3 = $ 427.07
Year 4 CF: $800 / (1.12)4 = $ 508.41
Total PV = $1,432.93

5-15

Calculator and Excel Solution

 0 1 2 3 4
Time
(years)

200 400 600 800

178.57
= 1/(1.12)2 x
318.88
= 1/(1.12)3 x
427.07
= 1/(1.12)4 x
508.41
1,432.93
5-16
Multiple Uneven Cash Flows Using the
TI BAII’s Cash Flow Worksheet
Clear all:
Press CF
Then 2nd
Then CE/C
CF0 is displayed as 0.00
Enter the Period 0 cash flow
If an outflow, press +/– to change
the sign
To enter the figure in the cash
flow register, press ENTER
5-17
TI BAII+: Uneven Cash Flows
Press the down arrow to move to
the next cash flow register
Enter the cash flow amount,
press ENTER and the down arrow
to move to the cash flow counter
(Fnn)
The default counter value is “1”
To accept the value of “1”, press the
down arrow again
To change the counter, enter the
correct count, press ENTER and
then the down arrow 5-18
TI BAII+: Uneven Cash Flows
Repeat for all cash flows, in order.
To find NPV:
Press NPV: I appears on the screen.
Enter the interest rate, press ENTER,
and then the down arrow to display
NPV.
Press CPT.

5-19
TI BAII+: Uneven Cash Flows
Cash Flows: Display You Enter
CF 2nd CE/C
CF0 = 0 C00 0 ENTER
C01 200 ENTER
CF1 = 200 F01 1 ENTER
C02 400 ENTER
CF2 = 400 F02 1 ENTER
C03 600 ENTER
CF3 = 600 F03 1 ENTER
C04 800 ENTER
CF4 = 800 F04 1 ENTER NPV
I 12 ENTER
down
NPV CPT
1432.93
5-20

Excel Solution
Present Value: Multiple Cash Flows
Another Example – Formula Solution
You are considering an investment that will
pay you $1,000 in one year, $2,000 in two
years and $3,000 in three years.
If you want to earn 10% on your money, how
much would you be willing to pay?
 PV = $1,000 / (1.1)1 = $ 909.09
 PV = $2,000 / (1.1)2 = $1,652.89
 PV = $3,000 / (1.1)3 = $2,253.94
 PV = $4,815.92 5-21

Calculator and Excel Solution

 Decisions, Decisions
Your broker calls you and tells
Use cash flow keys:
you that he has this great CF
investment opportunity. 2nd CE/C
If you invest $100 today, you will CF0 0 ENTER
receive $40 in one year and $75 C01 40 ENTER
F01 1 ENTER
in two years. C02 75 ENTER
If you require a 15% return on F02 1 ENTER
investments of this risk, should NPV
you take the investment? I 15 ENTER
DOWN CPT
91.49
No – the broker is charging more
than you would be willing to pay.
5-22
Saving For Retirement
You are offered the opportunity to put some
money away for retirement. You will receive five
annual payments of $25,000 each beginning in
40 years.
Use cash flow keys:
CF
2nd CE/C
How much would you CF0 0 ENTER
be willing to invest C01 0 ENTER
today if you desire an F01 39 ENTER
interest rate of 12%? C02 25000 ENTER

F02 5 ENTER
NPV
I 12 ENTER
DOWN 5-23

CPT
 0 1 2 … 39 40 41 42 43 44

0 0 0 … 0 25K 25K 25K 25K 25K

Notice that the year 0 cash flow = 0 (CF0 = 0)

Cash flows years 1–39 = 0 (C01 = 0; F01 = 39)
Cash flows years 40–44 = 25,000 (C02 = 25,000; F02 = 5)

5-24
Quick Quiz – Part 1
Suppose you are looking at the following possible cash
flows:
Year 1 CF = $100;
Years 2 and 3 CFs = $200;
Years 4 and 5 CFs = $300.
The required discount rate is 7%
What is the value of the CFs at year 5?
What is the value of the CFs today?

5-25

Calculator Solution
Quick Quiz 1 – Excel Solution
A B C D E
1 Chapter 5 - Quick Quiz 1
2 Rate 7%
3 Year Nper CF PV Formula
4 1 1 100 $93.46 =-PV($C$2,A4,0,C4)
5 2 2 200 $174.69 =-PV($C$2,A5,0,C5)
6 3 3 200 $163.26 =-PV($C$2,A6,0,C6)
7 4 4 300 $228.87 =-PV($C$2,A7,0,C7)
8 5 5 300 $213.90 =-PV($C$2,A8,0,C8)
9 Total PV $874.17 =SUM(C4:C8)
10

11 Year Nper CF FV Year

12 1 4 100 $131.08 =-FV($C$2,B12,0,C12)
13 2 3 200 $245.01 =-FV($C$2,B13,0,C13)
14 3 2 200 $228.98 =-FV($C$2,B14,0,C14)
15 4 1 300 $321.00 =-FV($C$2,B15,0,C15)
16 5 0 300 $300.00 =-FV($C$2,B16,0,C16) 5-26
17 Total FV $1,226.07 =SUM(C12:C16)
Chapter 5 – Quick Quiz 1
$ 874.12 PV
$ 213.90
$ 228.87
$ 163.26
$ 174.69
$ 93.46

7%
Period 0 1 2 3 4 5

CFs 0 100 200 200 300 300

$ 300.00
$ 321.00
$ 228.98
$ 245.01
$ 131.08
FV = $ 1,226.07
5-27
Annuities and Perpetuities
Annuity – finite series of equal payments that
occur at regular intervals
If the first payment occurs at the end of the period,
it is called an ordinary annuity
If the first payment occurs at the beginning of the
period, it is called an annuity due
Perpetuity – infinite series of equal payments.

5-28
Annuities and Perpetuities
Basic Formulas
Perpetuity: PV = PMT / r
Annuities:
 1 
 1  (1  r ) t 
PV  PMT  
 r 

 


 (1  r ) t  1
FV  PMT  
 r 

5-29
Annuities and the Calculator
The PMT key on the calculator is used for the
equal payment
The sign convention still holds
Ordinary annuity versus Annuity due
Switch your calculator between the two types (next
slide)
If you see “BGN” or “Begin” in the display of your
calculator, you have it set for an annuity due
Most problems are ordinary annuities

5-30
TI BAII+:
Set Annuity Time Value Parameters
Set END for an ordinary annuity or BGN for an
annuity due
Press 2nd BGN (above PMT)
This is a toggle switch. The default is END.
To change to BEGIN, press 2nd SET (above ENTER) to go
back and forth.

5-31
Excel Spreadsheet Functions
FV(Rate,Nper,Pmt,PV,0/1)
PV(Rate,Nper,Pmt,FV,0/1)
RATE(Nper,Pmt,PV,FV,0/1)
NPER(Rate,Pmt,PV,FV,0/1)
PMT(Rate,Nper,PV,FV,0/1)

Inside parens: (RATE,NPER,PMT,PV,FV,0/1)

“0/1” Ordinary annuity = 0 (default; no entry needed)
Annuity Due = 1 (must be entered)

5-32
Important Points to Remember
Interest rate and time period must
match!
Annual periods  annual rate
Monthly periods  monthly rate
The Sign Convention
Cash inflows are positive
Cash outflows are negative

5-33
Sign Convention Example
5 N 5 N
10 I/Y 10 I/Y
-100 PV -100 PV
20 PMT -20 PMT
CPT FV = $38.95 CPT FV =
$283.15
Implies you deposited Implies you deposited
$100 today and plan to $100 today and plan to
WITHDRAW $20 a year ADD $20 a year for 5
for 5 years years
+CF = Cash INFLOW to YOU -CF = Cash OUTFLOW from you

5-34
Annuity
Example 5.5
You can afford $632 per 48 N
month. 1 I/Y
632 PMT
Going rate = 1%/month 0 FV
for 48 months. CPT PV = 23,999.54
($24,000)
How much can you
borrow?  1 
 1 
You borrow money (1.01) 
48
PV  632    23,999.54
.01
TODAY so you need to 



compute the present
value.
=PV(0.01,48,-632,0)
5-35
Annuity – Sweepstakes Example
Suppose you win the Publishers
Clearinghouse $10 million sweepstakes.
The money is paid in equal annual
installments of $333,333.33 over 30 years.
If the appropriate discount rate is 5%, how
much is the sweepstakes actually worth
today?
 PV = $333,333.33[1 – 1/1.0530] / .05 = $5,124,150.29

5-36

Calculator and Excel Solution

Buying a House
You are ready to buy a house and you have $20,000 for a
down payment and closing costs.
Closing costs are estimated to be 4% of the loan value.
You have an annual salary of $36,000.
The bank is willing to allow your monthly mortgage
payment to be equal to 28% of your monthly income.
The interest rate on the loan is 6% per year with monthly
compounding (.5% per month) for a 30-year fixed rate loan.
How much money will the bank loan you?
How much can you offer for the house?
5-37
Buying a House - Continued
Bank loan
Monthly income = 36,000 / 12 = 3,000
Maximum payment = .28(3,000) = 840
 360 N(30*12)
 0.5 I/Y
=PV(.005,360,-840,0)
 -840 PMT
 CPT PV = 140,105

Total Price
Closing costs = .04(140,105) = 5,604
Down payment = 20,000 – 5604 = 14,396
Total Price = 140,105 + 14,396 = 154,501

5-38
Quick Quiz – Part 2
You know the payment amount for a loan and you
want to know how much was borrowed.
Do you compute a present value or a future value?

5-39
Quick Quiz – Part 2
You want to receive $5,000 per month in retirement.
If you can earn .75% per month and you expect to need
the income for 25 years, how much do you need to
have in your account at retirement?
300 N  Months
0.75 I/Y  Monthly rate
5000 PMT  Monthly Payment
0 FV
CPT PV = -595,808.11

=PV(0.0075,300,5000,0)
5-40
Finding the Payment
Suppose you want to
borrow $20,000 for a new 4(12) = 48 N
car. 0.66667 I/Y
You can borrow at 8% per 20,000 PV
year, compounded 0 FV
monthly (8/12 = .66667% CPT PMT = -488.26
per month).
If you take a 4 year loan,
what is your monthly
payment? =PMT(0.006667,48,20000,0)

5-41
Finding the Number of Payments
Example 5.6
$1,000 due on credit card
Payment = $20 month minimum
Rate = 1.5% per month
The sign convention matters!!!

1.5 I/Y
1000 PV
-20 PMT =NPER(0.015,-20,1000,0)
0 FV
CPT N = 93.111 months
= 7.75 years

5-42
Finding the Number of Payments
Another Example
Suppose you borrow $2,000 at 5% and you are going to
make annual payments of $734.42. How long before
you pay off the loan?

5 I/Y
2000 PV =NPER(0.05,-734.42,2000,0)
-734.42 PMT
0 FV
CPT N = 3 years

5-43
Finding the Rate
Suppose you borrow $10,000 from your parents to buy
a car. You agree to pay $207.58 per month for 60
months. What is the monthly interest rate?

60 N
10000 PV =RATE(60,-207.58,10000,0)
-207.58 PMT
0 FV
CPT I/Y = 0.75%
per month
5-44
Quick Quiz – Part 3
You want to receive $5,000 per month for the next 5
years. How much would you need to deposit today if
you can earn .75% per month?

60 N (months)
0.75 I/Y =PV(0.0075,60,5000,0)
5000 PMT
0 FV
CPT PV = -240866.87
5-45
Quick Quiz – Part 3
You want to receive $5,000 per month for the next 5
years.
What monthly rate would you need to earn if you only
have $200,000 to deposit?

60 N
-200000 PV =RATE(60,5000,-200000,0)
5000 PMT
0 FV
CPT I/Y = 1.4395%
per month 5-46
Quick Quiz – Part 3
Suppose you have $200,000 to deposit and can
earn .75% per month.
How many months could you receive the
$5,000 payment?
0.75 I/Y
-200000 PV =NPER(0.0075,5000,-200000,0)
5000 PMT
0 FV
CPT N = 47.73
months
≈ 4 years 5-47
Quick Quiz – Part 3
Suppose you have $200,000 to deposit and can
earn .75% per month.
How much could you receive every month for 5 years?

60 N =PMT(0.0075,60,-200000,0)
0.75 I/Y
-200000 PV
0 FV
CPT PMT = 4151.67

5-48
Future Values for Annuities
Suppose you begin saving for your retirement by
depositing $2,000 per year in an IRA. If the interest
rate is 7.5%, how much will you have in 40 years?

=FV(0.075,40,-2000,0)
40 N
7.5 I/Y
0 PV  (1  r )t  1
FV  PMT  
 r 
-2000 PMT
 (1.075) 40  1
CPT FV = 454513.04 FV  2000   454,513.04
 .075 

5-49
 Annuity Due
You are saving for a new house and you put $10,000 per year
in an account paying 8%. The first payment is made today.
How much will you have at the end of 3 years?

=FV(0.08,3,-10000,0,1)
2nd BGN 2nd SET
3 N  (1  r ) t  1
FVAD  PMT   (1  r )
8 I/Y  r 
0 PV FVAD  10000
 (1.08) 3  1
 (1.08)  35,061.12
 . 08 
-10000 PMT
CPT FV = 35061.12
2nd BGN 2nd SET  Reset to
END 5-50
Table 5.2

5-51
Example: Work the Web
Another online financial calculator can be found
at Calculatoredge.com.
Click on the Web surfer, select “Finance”
calculator and “Annuity Payments” and work the
following example:
How much could you withdraw each year if you
have $2,500,000, earn 8% and make annual
withdrawals for 35 years?

5-52
Perpetuity
Example 5.7
Perpetuity formula: PV = PMT / r
Current required return:
40 = 1 / r
r = .025 or 2.5% per quarter
Dividend for new preferred:
100 = PMT / .025
PMT = 2.50 per quarter

5-53
Quick Quiz – Part 4
You want to have $1 million to use for retirement
in 35 years. If you can earn 1% per month, how
much do you need to deposit on a monthly basis if
the first payment is made in one month?
Ordinary Annuity
420 N
1 I/Y =PMT(0.01,420,0,1000000)
0 PV
1000000 FV
CPT PMT = -155.50

5-54
 Quick Quiz – Part 4
You want to have $1 million to use for retirement
in 35 years. If you can earn 1% per month, how
much do you need to deposit on a monthly basis if
the first payment is made today?
2nd BGN 2nd SET Annuity Due
420 N
1 I/Y =PMT(0.01,420,0,1000000,1)
0 PV
1000000 FV
CPT PMT = -153.96
2nd BGN 2nd SET
5-55
Quick Quiz – Part 4
You are considering preferred stock that pays a
quarterly dividend of $1.50. If your desired return is 3%
per quarter, how much would you be willing to pay?

$1.50/0.03 = $50

5-56
Interest Rates
Effective Annual Rate (EAR)
The interest rate expressed as if it were compounded
once per year.
Used to compare two alternative investments with
different compounding periods

Annual Percentage Rate (APR) “Nominal”

The annual rate quoted by law
APR = periodic rate X number of periods per year
Periodic rate = APR / periods per year

Return to 5-57

Quick Quiz
Things to Remember
You ALWAYS need to make sure that the interest
rate and the time period match.
Annual periods  annual rate.
Monthly periods  monthly rate.

If you have an APR based on monthly

compounding, you have to use monthly periods for
lump sums or adjust the interest rate accordingly.

5-58
 m
 APR 
EAR  1   1
 m 
APR = the quoted rate
m = number of compounds per year

5-59
EAR and APR in TI BA II+
2nd ICONV
2nd CE/C (to clear the memory)
3 fields in worksheet:
NOM (Nominal rate-APR)
EFF (Effective annual rate)
C/Y (Compounding periods/yr)

To compute EFF, enter the NOM and C/Y values, move
to EFF and press CPT
To compute NOM, enter the EFF and C/Y values, move
to NOM and press CPT
5-60
EAR and NOM in Excel
2 Functions:
=EFFECT(Nom, Nper)
=NOMINAL(Eff, Nper)

All rates entered as decimals

Nper = number of compounding periods per year

TOOLS … Add-Ins … ANALYSIS TOOLPAK

5-61
Decisions, Decisions
Which savings accounts should you choose:
5.25% with daily compounding.
5.30% with semiannual compounding.
First account:
 EAR = (1 + .0525/365)365 – 1 = 5.39%
 ICONV: NOM=5.25; C/Y=365 EFF=5.3899

 Excel: =EFFECT(0.525,365) = 5.39%

Second account:
 EAR = (1 + .053/2)2 – 1 = 5.37%
 ICONV: NOM=5.3; C/Y=2 EFF=5.3702
 Excel: =EFFECT(0.53,2) = 5.37%
5-62
Computing APRs
What is the APR if the monthly rate is .5%?
 .5%(12) = 6%
What is the APR if the semiannual rate is .5%?
 .5%(2) = 1%
What is the monthly rate if the APR is 12% with
monthly compounding?
 12% / 12 = 1%
 Can you divide the above APR by 2 to get the
semiannual rate?
 NO. You need an APR based on semiannual compounding to
find the semiannual rate.
5-63
Computing EAR and APR
Suppose you can earn 1% per month on $1 invested
today.
What is the APR? 1(12) = 12%
How much are you effectively earning?
 FV = 1(1.01)12 = 1.1268
 Rate = (1.1268 – 1) / 1 = .1268 = 12.68%

INCONV: NOM = 12
C/Y = 12
EFF = 12.6825

=EFFECT(0.12,12)

5-64
Computing EAR and APR
Suppose if you put it in another account, you earn
3% per quarter.

What is the APR? 3(4) = 12%

How much are you effectively earning?
 FV = 1(1.03)4 = 1.1255
 Rate = (1.1255 – 1) / 1 = .1255 = 12.55%

ICONV: NOM = 12
C/Y = 4
EFF= 12.5509

=EFFECT(0.12,4)
5-65
Computing APRs from EARs

APR  m (1  EAR)
1
m
-1
 
M = number of compounding periods per year

5-66
APR - Example
Suppose you want to earn an effective rate of
12% and you are looking at an account that
compounds on a monthly basis. What APR
must they pay?
 
APR  12 (1  .12)1/ 12  1  .113 8655 or 11.39%
ICONV: EFF = 12
C/Y = 12
NOM = 11.3866

Excel: =NOMINAL(0.12,12)
5-67
Computing Payments with APRs
Suppose you want to buy a new computer.
The store is willing to allow you to make monthly payments.
The entire computer system costs $3,500.
The loan period is for 2 years.
The interest rate is 16.9% with monthly compounding.
What is your monthly payment?

2(12) = 24 N
16.9 / 12 = 1.40833 I/Y
3500 PV
0 FV
CPT PMT = -172.88
5-68

=PMT(0.0140833,24,3500,0)
Future Values
with Monthly Compounding
Suppose you deposit $50 a month into an
account that has an APR of 9%, based on
monthly compounding. How much will you
have in the account in 35 years?

420 N(35*12) =FV(0.0075,420,-50,0)

0.75 I/Y(9/12)
0 PV
-50 PMT
CPT FV = 147,089.22

5-69
Present Value with Daily Compounding
You need $15,000 in 3 years for a new car. If you
can deposit money into an account that pays an
APR of 5.5% based on daily compounding, how
much would you need to deposit?
1095 N(3*365)
.015068493 I/Y(5.5/365)
0 PMT
15,000 FV
CPT PV = -12,718.56

=PV(0.00015,1095,0,15000) 5-70
Quick Quiz: Part 5
What is the definition of an APR?
What is the effective annual rate?
Which rate should you use to compare alternative
investments or loans?
Which rate do you need to use in the time value of
money calculations?

(Answers = Slide 5.57)

5-71
Pure Discount Loans
Treasury bills are excellent examples of pure
discount loans.
Principal amount is repaid at some future date
No periodic interest payments

If a T-bill promises to repay $10,000 in 12 months

and the market interest rate is 7 percent, how
much will the bill sell for in the market?
1 N; 10,000 FV; 7 I/Y; CPT PV = -9345.79
=PV(.07,1,0,10000)

Return to 5-72

Quick Quiz
Amortized Loan with Fixed Payment
Example
Each payment covers the interest expense plus reduces
principal
Consider a 4-year loan with annual payments. The
interest rate is 8% and the principal amount is $5000.
What is the annual payment?
 5,000 = PMT[1 – 1 / 1.084] / .08 PMT = 1,509.60
 =PMT(0.08,4,5000,0) = 1509.60

 4 N; 8 I/Y; 5000 PV, 0 FV, CPT PMT = 1509.60

Return to 5-73

Quick Quiz
Amortized Loan with Fixed Payment -
Example
Beginning Total Payment Interest Principal Ending
Year Balance Payment Paid Paid Balance
1 $ 5,000.00 $ 1,509.60 $ 400.00 $ 1,109.60 $ 3,890.40
2 $ 3,890.40 $ 1,509.60 $ 311.23 $ 1,198.37 $ 2,692.03
3 $ 2,692.03 $ 1,509.60 $ 215.36 $ 1,294.24 $ 1,397.79
4 $ 1,397.79 $ 1,509.60 $ 111.82 $ 1,397.79 $ -
Totals $ 6,038.40 $ 1,038.42 $ 5,000.00

Interest Paid = Beginning Balance * Rate (8%)

Principal Paid = Total Payment – Interest Paid
Ending Balance = Beginning Balance – Principal Paid

5-74
Quick Quiz: Part 6
What is a pure discount loan?
What is a good example of a pure
discount loan? (Slide 5.72)
What is an amortized loan?
What is a good example of an
amortized loan? (Slide 5.73)

5-75
Example: Work the Web
Several Web sites have calculators that will
prepare amortization tables quickly
One such site is Bankrate.com
Click on the Web surfer, select “Calculators,”
“Mortgage Payment Calculator,” and enter the
following information:
Loan amount = $20,000
Term = 10 years
Interest rate = 7.625%
What is the monthly payment? 5-76
Chapter 5
 END 5-77
FV Example 5.1
Calculator Solution
Calculator Solution
Year N I/Y PV PMT CPT FV
0 3 8 -7000 0 8,817.98
1 2 8 -4000 0 4,665.60
2 1 8 -4000 0 4,320.00
3 4,000.00
21,803.58
Value at year 4:
Year N I/Y PV PMT CPT FV
4 1 8 -21,803.58 0 23,547.87

Return to 5-78
Slideshow
FV Example 5.1
Excel Solution
Excel Solution
Year Nper Rate PV PMT FV
0 3 0.08 -7000 0 8,817.98
1 2 0.08 -4000 0 4,665.60
2 1 0.08 -4000 0 4,320.00
3 4,000.00
21,803.58
Value at year 4:
Year Nper Rate PV PMT FV
4 1 0.08 -21,803.58 0 23,547.87

=FV(Rate, Nper,PMT,PV)

Return to 5-79
Slideshow
FV Example 2
Calculator Solution
Calculator Solution
CPT
Year N I/Y PV PMT FV
0 2 9 500 0 594.05
1 1 9 600 0 654.00
1,248.05

Value at year 4: CPT

Year N I/Y PV PMT FV
5 3 9 1,248.05 0 1,616.26

or CPT
Year N I/Y PV PMT FV
0 5 9 500 0 769.31
1 4 9 600 0 846.95
1,616.26

Return to 5-80
Slideshow
FV Example 2
Excel Solution
Excel Solution
Year Nper Rate PV PMT FV
0 2 0.09 -500 0 594.05
1 1 0.09 -600 0 654.00
1,248.05
Value at year 4:
Year Nper Rate PV PMT FV
5 3 0.09 -1,248.05 0 1,616.26

=FV(Rate, Nper,PMT,PV)

Return to 5-81

Slideshow
FV Example 3
Calculator & Excel Solution
Calculator Solution CPT
Year N I/Y PV PMT FV
1 4 8 -100 0 136.05
3 2 8 -300 0 349.92
485.97
Excel Solution
Year Nper Rate PV PMT FV
1 4 0.08 -100 0 136.05
3 2 0.08 -300 0 349.92
485.97
=FV(Rate, Nper,PMT,PV)

Return to 5-82

Slideshow
Multiple Cash Flows - Example 5.3
Calculator Solution
CPT
Year N I/Y FV PMT PV
1 1 12 200 0 178.57
2 2 12 400 0 318.88
3 3 12 600 0 427.07
4 4 12 800 0 508.41
1,432.93

Return to 5-83
Slideshow
Multiple Cash Flows - Example 5.3
Excel Solution
Excel Solution
Year Nper Rate FV PMT PV
1 1 0.12 -200 0 178.57
2 2 0.12 -400 0 318.88
3 3 0.12 -600 0 427.07
4 4 0.12 -800 0 508.41
1,432.93

=PV(Rate, Nper,PMT,FV)

Return to 5-84

Slideshow
Excel – PV of Multiple Uneven CFs
Rate 12%
Present
Period Cash Flow Formula
Value
1 $ 200.00 ($178.57) =PV($B$1,A3,0,B3)
2 $ 400.00 ($318.88) =PV($B$1,A4,0,B4)
3 $ 600.00 ($427.07) =PV($B$1,A5,0,B5)
4 $ 800.00 ($508.41) =PV($B$1,A6,0,B6)

Total PV = ($1,432.93) =SUM(C3:C6)

($1,432.93) =-NPV(B1,B3:B6)

The functions require a PMT = 0.

Return to 5-85

Slideshow
Multiple Cash Flows – PV Example
Calculator & Excel Solutions
Calculator Solution CPT
Year N I/Y FV PMT PV
1 1 10 -1000 0 909.09
2 2 10 -2000 0 1,652.89
3 3 10 -3000 0 2,253.94
4,815.92
Excel Solution
Year Nper Rate FV PMT PV
1 1 0.10 -1000 0 909.09
2 2 0.10 -2000 0 1,652.89
3 3 0.10 -3000 0 2,253.94
4,815.92
=PV(Rate, Nper,PMT,FV)

Return to 5-86
Slideshow
Quick Quiz: Part 1
Discount Rate 7% Calculator:
Year CF Keystrokes
1 100 CF 2nd ClrWork
2 200 CF0 0 ENTER
3 200 C01 100 ENTER F01 1 ENTER
4 300 C02 200 ENTER F02 2 ENTER
5 300 C03 300 ENTER F03 2 ENTER
NPV   ENTER
I 7 ENTER
DOWN CPT   874.17

Year 3 Year 5
N 3 5
I/Y 7 7
PV -874.17 -874.17
PMT 0 0
CPT FV 1070.89 1226.07

Return to 5-87
Slideshow
Annuity – Sweepstakes Example
Sweepstakes Example

N 30
I/Y 5
PMT $ 333,333.33
FV 0
CPT PV $ (5,124,150.29)

=PV(5, 30, 333333.33, 0) =

($5,124,150.29)

Return to 5-88
Slideshow