Financial Modelling: TVM Basic

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Financial Modelling: TVM Basic
2014-10-20 22:31:17
125 250 M3 TVM


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  1. Time value of money
    • A dollar today is worth more than a dollar tomorrow. This is called the time value of money.

    • • Due to
    • – the potential earning capacity of money.
    • – the destructive force of inflation.

    •Time value of money is a fundamental concept of finance.
  2. Future Value
  3. Present Value
  4. Compound Frequency
    • • Compound interest arises when interest is added to the principal, so that, from that moment on, the interest that has been added also earns interest.
    • • If interest was paid once per year. This is called annual compounding. Often, interest is paid more often than once per year

  5. Annuity
    Stream of equal periodic cash flows over a specified time period

    • Two types:
    • 1) ORDINARY ANNUITY: C.F. occurs at end of each period
    • 2) ANNUITY DUE: C.F. occurs at beginning of each period
  6. FV of Ordinary Annuity
  7. FV of Annuity Due
    Earns interest for a year more than an ordinary annuity, as the cash flows occur at the start of the period.

    Annuity Due = Ordinary Annuity X (1+i)
  8. PV of Ordinary Annutiy
  9. NPV Function
    Computes the present value (not net present value!) of a series of payments
  10. PV vs. NPV
    • The primary difference between PV and NPV:

    • PV allows cash flows to begin either at the end or at the beginning of the period.
    • As for NPV, cash flows must be equally spaced in time (must be constant throughout the investment) and occur at the end of each period.
  11. NPER Function
    • • Calculates the number of periods to repay a loan given a fixed repayment
    • = NPER (B9, B11, -B10)

    • a is the interest rate
    • b is the annual payment
    • c is the loan amount
  12. Loan amortization
    • You borrow $10,000 for 5 years
    • Interest rate 7%
    • Bank wants same sum X repaid each year
    • How to compute X?

    Note: PMT
    • PMT Function
    • = PMT (C4, C5, C6)

    • a is the interest rate
    • b is the number of periods
    • c is the principle

    PMT is similar to PV regarding its assumptions of payments being at the end of the period and it producing a negative number
  13. Why Solver instead of Goal Seek?
    • Solver “remembers” what it did before, whereas Goal Seek“forgets”
    • – If you do another iteration of the problem with Solver, it will recall its previous settings

    • Solver can do more sophisticated calculations: It can do linear programming …
  14. RATE function
    • Calculates the internal rate of returns of a series of constant payments

    = RATE (B13, B14, - B12 ,,1)

    • • a is the number of periods
    • • b is the annual payment
    • • c is the initial payment
    • • d indicates that the payments occur at the beginning of each period