The Time Value of Money

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The Time Value of Money

Special Considerations in Time Value Analysis

Patterns of Payment

Time value of money problems may evolve around a number of different payment or receipt patterns

The factor for i

Is then determined by dividing the quoted annual interest rate by the number of compounding periods

To determine n

Multiply the number of years by the number of compounding periods during the year

Determining the Yield on an Investment

Present Value of an Annuity

Same type of approximated or interpolated yield that applied to a single amount can also be applied

PVIFA=PVA/A

Present Value of a Single Amount

The determination of PVIF does not give us the final answer, but it scales down the problem so we may ascertain the answer

PVIF=PV/FV

Present Value

Each individual payment is discounted back to the present and then all of the discounted payments are added up

P[(1-(1+i)^-1/i)]

Formula derived from the original formula for future value

FV[I/(1+i)^n]

Future Value

Annuity

Series of consecutive payments or receipts of equal amount

FVA = P * ([1 + I]^N - 1 )/I

Single Amount

Measure the value of an amount that is allowed to grow at a given interest rate over a period of time

FV = PV(1 + i)^n