OVERVIEW OF TIME VALUE OF MONEY %

Consider financial goals in terms of money, time, and interest.

Financial App Mathematical TVM Tables

Spreadsheet
Calculator (online search) Formula (see Textbook)
Periods 4.00% 5.00% 6.00%

$
FV=PV(1+I)N 1
2
0.96154
0.92456
0.95238
0.90703
0.94340
0.89000
3 0.88900 0.86384 0.83962
4 0.85480 0.82270 0.79209
5 0.82193 0.78353 0.74726
6 0.79031 0.74622 0.70496
7 0.75992 0.71068 0.66506

Time Value of Money (TVM) Financial Spreadsheet

Variable Definitions Calculator Key Function/Reference
For TVM problems, you need to know Note, this is specific to The bolded values are required,
the values of 3 of the variables in order the TI BAll PlusTM. Other the values in square brackets are optional.
to determine other values. financial calculators may vary.

Present value of a lump sum or a series of

payments (annuity).
PV = PV(rate, nper, pmt, [fv], [type])

Future value of a lump sum or a series of = FV(rate, nper, pmt, [pv], [type])
payments (annuity). FV
Interest, which is the rate of return or
discount rate used to determine a FV or PV; I/Y rate
sometimes known as internal rate of return.
All TVM calculations assume compound
interest.

Number of periods (or payments if an

annuity) in which compounding N nper
or discounting occurs.

Payment/Annuity payment is a series of = PMT(rate, nper, pv, [fv], [type])

more than one payment or deposits; PMT
in TVM terminology, a PMT is also known
as an annuity.

Annuity Due indicates that the payment = PV(rate, nper, pmt, [fv], [type])
used in a TVM calculation comes at 2ND PMT
the beginning of a period. Unless instructed to change to Begin Mode. For [type], the default is “0” for end-of-period.
otherwise, you should assume that Enter “1” to change the default, to specify
payments come at the end of a period. Normally, the calculator is
that payments or deposits come at
Annuity-due assumptions are the exception working in End Mode,
the beginning of the period.
to the rule. assuming the cash flows
occur at the end of the
period.
Be sure to reset/change
back to End Mode when
you are done.
 Common Types of TVM Problems
Future Value (FV) of a Lump Sum
Estimates how much current savings and investments will be worth at a certain Here’s How You Do it
date in the future.
Financial calculator inputs:
You start with: $1,000 today
N=3
Interest rate: 10%
I = 10
How much will you have in 3 years?
PV = 1000
CPT FV = $1,331
Answer: multiply $1,000 by (1.10 × 1.10 × 1.10) = $1,331.
Spreadsheet:
When looking for a future value, you multiply your present value by
Use the FV function and
a factor greater than 1.0.
relevant values or cell references
= FV (rate, nper, pmt, [pv], [type])
N = 3 years = FV (0.10, 3, 0, -1000)
I = 10% $121
$110
= $1,331
Principal $210
$100 $100
Current FV=PV(1+I)N
Mathematical formula:
year interest
Past interest FV = PV(1 + I)N

$1,000 $1,000 $1,000 $1,000

FV = 1,000 (1 + 0.10)3
FV = 1,000 (1.10)3
FV = 1,000 x 1.331
FV = $1,331
0 1 2 3

$1,000 $1,100 $1,210 $1,331

Present value Future value

Present Value (PV) of a Lump Sum

Determines the current value of a future amount. Here’s How You Do it
You might use a present value calculation when you know how much you will need in Financial calculator inputs:
the future (FV) but you are unsure if the amount you have today (PV) is going to be N=3
enough given your time horizon (N) and rate of return (I). I = 10
PV = 5000
You know: You will need $5,000 in 3 years.
CPT PV = $3,757 (rounded)
Interest rate: 10%
Do you have enough now to achieve that?
Spreadsheet:
Answer: Achieved by discounting the future value: $3,757 Use the PV function and
relevant values or cell references
Notice that when finding the present value, you multiply the future
= PV (rate, nper, pmt, [fv], [type])
amount by a factor that is less than 1.0
= PV (0.10, 3, 5000)
= $3,757
N = 3 years
I = 10% FV=PV(1+I)N Mathematical formula:
FV
PV =
$4,546
$5,000 (1 + I)N
$4,133 ×
× 5,000
× (1/1.10) PV =
(1/1.10)
(1/1.10) = (1 + 0.10)3
= $5,000
= $5,000
$4,546 5,000
$4,133 × PV =
×
× 0.9091 (1.10)3
0.9091
0.9091 = 5,000
=
= $4,546 PV =
$4,133 1.331
$3,757
0 1 2 3 PV = $3,757 (rounded)
$3,757 $4,133 $4,546 $5,000
Present value Future value
 Future Value (FV) of an Annuity
Estimates how much you will have in the future if you save or invest a set dollar amount on a regular basis.

You invest: $2,000 at the end of each year for 3 years. Here’s How You Do it
Rate of return: 10%.
Financial calculator inputs:
There is no other money in the account at the start.
N=3
Answer: Future value (FV) of $6,620. I = 10
PV = 0
An annuity is a series of equal payments. PMT = 2000
CPT FV = $6,620
Spreadsheet:
Use the FV function and
relevant values or cell references
= FV (rate, nper, -pmt, [fv], [type])
$2,000
= FV (0.10, 3, -2000)
N = 3 years = $6,620
I = 10% 1.1
FV=PV(1+I)N Mathematical formula:
×
Annuity $2,000 PMT (1 + I)N - 1
$2,000 FVA =
= I
Prior year annuity
$2,200
plus interest 2,000
1.1 × 1.1
FVA = (1 + 0.10)3 - 1
Previous year annuity 1.1 1.10
plus interest × ×
$2,000 2,000
$2,000 $2,000 FVA = 1.331 - 1
= = 1.10
$0 $2,200 $2,420
2,000
FVA = 0.331
0 1 2 3 1.10
$0 $2,000 $4,200 $6,620 FVA = 20,000 0.331
Present value Future value
FVA = $6,620

Present Value (PV) of an Annuity

Determines the current value of a regular series of equal payments occurring in the future. Here’s How You Do it
How much is the following stream of income worth to you today? Financial calculator inputs:
You’ll receive: $2,000 each year for 3 years. N=3
If you had the money today: You could earn a 10% rate I = 10
of return if you invested it. PMT = 2000
CPT PV = $4,974 (rounded)
Answer: Achieved by discounting the future value: $4,974 (PV).
Spreadsheet:
If interest rates are positive, the present value amount is always less than Use the PV function and
the future value amount. relevant values or cell references
= PV (rate, nper, pmt)
N = 3 years = PV (0.10, 3, 2000)
I = 10% = $4,974 (rounded)

FV=PV(1+I)N Mathematical formula:

Discounted 3rd, 2nd, and Discounted 3rd and 2nd Discounted 3rd
PMT
[1 - (1+1 I)
1st payments payments payment
PVA =
[
N
(1/1.10) × (1/1.10) × (1/1.10) × $2,000 (1/1.10) × (1/1.10) × $2,000 (1/1.10) × $2,000 I
+ (1/1.10) × (1/1.10) × $2,000 + (1/1.10) × $2,000 = $1,503 + $1,653 + $1,818
+ (1/1.10) × $2,000 = $1,503 + $1,653 + $1,818 3rd payment: $2,000 2,000 1 - 1
PVA =
= $1,503 + $1,653 + $1,818 2nd payment: $2,000 0.10 (1+0.10)3
1st payment: $2,000
1
PVA = 20,000 1 -
(1.10)3
PVA = 20,000 1 - 1
1.331
PVA = 20,000 1 - 0.75131
0 1 2 3
$4,974 PVA = 20,000 0.24869
Present value Future value
PVA = $4,974 (rounded)
 Present Value of an Annuity Due
Determines the current value of a regular series of equal payments occurring in the future.

Here’s How You Do it

Annuity due means that the payments or Financial calculator inputs: FV=PV(1+I)N Mathematical formula:
deposits come at the beginning of
Change calculator
the period.
[1 - (1 1+ I)
to Begin Mode PVAD =
PMT [ (1 + I)
N
All of the other formulas assume that the I
N=3
payments come at the end of the period.
I = 10 2,000 1 - 1
PVAD =
PMT = -2000 0.10 (1 + 0.10)3 (1 + 0.10)
Example:
CPT PV = $5,471 (rounded)
1
If you want to contribute to PVAD = 20,000 1 - (1.10)
(1.10)3
your child’s college education Spreadsheet:
expense, tuition must be paid 1
Use the PV function and PVAD = 20,000 1 - (1.10)
at the beginning of each year. 1.331
relevant values or cell references
= PV (rate, nper, pmt, [fv], [type]) PVAD = 20,000 1 - 0.75131 (1.10)
January PV of Annuity Due = $5,471
= PV (0.10, 3, 2000, 0, 1)
(vs PV of regular Annuity = PVAD = 20,000 0.24869 (1.10)
= $5,471 (rounded)
$4,974)
PVAD = $5,471 (rounded)

Amortization or Payment Schedule

Calculates the payment you need to make on a car, home, education, or similar type of loan.

Amortization involves paying off a current loan or debt using a series of payments over time.
At the end of the time period, the loan value will be zero.

Loan Amount 1st Required Future Required Last Payment

Payment Payments · $0 Loan Balance
Period 0 (today) End of Period 1 End of Period 2 at Last Period
$Loan $X $X $0

Many loans are amortized on a monthly basis (3 year loan = 30 payments)

TVM Shortcut: The Rule of 72

To find the approximate number of years (or periods) needed to double your money, divide 72 by the interest rate (or 72/I).

Number of years (or periods) 72

needed to double your money (N) =
Interest rate (I)

72
N =
I

To estimate the approximate interest rate needed to double your money, divide 72 by the number of years (or periods) in your
goal time horizon (or 72/N).

%
Interest rate (I) needed 72
=
to double your money Number of years (or periods) in your goal time horizon (N)

72
I =
N