Hey guys! welcome to the faceless tutorial on time value of money. This is your tech TA taehun Kim unfortunately this tutorial will be from the beginning to the end faceless and for some of you out there it's you're really missing out much because I'm.
Good-looking and for those of you also who have wondered whether I am a male or female as you can tell from my voice I am a male and but on the flipside it's. Okay, because I'm I'm happily married.
You're not losing much on the faceless aspect of the tutorial. All right.
Let's begin for this tutorial you will need a financial calculator. This is HP 10 b2 plus it's the one required on your syllabus alternatively you can use HP 12c or at Eid a2 plus they all work the same it's just a matter of pressing different different buttons at a different time but they basically do the same thing you just need to find the right manual if you have any other types of financial calculators again like I said we're going to be covering the topic using HP 10 b2 +.
What is the time value of money it means that a dollar today is worth differently from $1 tomorrow.
You can buy some stuffs with $1 today in the future you won't be able to buy that same stuff using tomorrow's dollar and surprisingly. This is not because of inflation even without inflation the dollar value will change from today to tomorrow because of interest but that goes beyond the scope of this course.
I will let you figure out what that is and we'll just continue to focus on the interest aspect of the time value of money for today's tutorial I will cover four topics first is future value calculation and then present value calculation and then calculations of annuities the annuities are a series of cash those that are equal in amount for a fixed period and then lastly I will cover simple and PV calculation and PV stands for net present value.
It's different amounts a series of different amount of cash flows within a fixed period that you want to calculate the present value of.
The first topic is future value suppose you have a thousand dollars and the annual interest rate is 10 percent and interested interest is paid annually.
Once a year how much will you have in year 2 is the question.
Say at year 0 you have a thousand dollars and again your interest is 10% and in decimals that would be 0.1.
In year one you're going to have that thousand dollars invested with 1 which is the principle a thousand dollars plus the interest rate at with B times 1 point 1.
You will end up with $1,100 after year 1 and year 2 you're going to have sorry $1,100 times 1 point 1 again and I don't know if you can tell what my name but I'm I'm Asian.
I can do this in my head but if you can't please do use your calculator alternatively you can use the year 0 and just instead of multiplying it twice you can use a power and still get the same answer.
At the end of the year two you will have one thousand two hundred ten dollars now this may seem simple but it is tedious and as you can see you will see in the NPV calculation as the amounts get a month differ from one period to another and you have a longer period then you know if it was kind of complicated or rather tedious so. This is where the financial calculator comes in.
Before we begin let me just give you a very brief tutorial on the calculator.
All the white white alphanumeric codes on the face of the button you can just press to get to use those buttons and then the ones that are blue you must shift blue shift little up shift and then hit it to use that and obviously a red same thing you want to hit red and that button to use the red functions.
Before you take on any any questions you have to clear the memory because you don't want the previous input to affect your current problem.
In order to do that you hit blue CMM clear memory C and one for to erase all a time value of money memory stuff and memory input and later when we do NPV calculation we want to do up C zero for cash flow clear you have to see that message otherwise you probably didn't do it correctly.
See that message that time value of money is cleared or cash flow is cleared you have to see that message before you proceed there's a thousand dollars on your hand right now and you want to deposit it and get interest there's an annual payment of interest one per year and then the interest rate is 10 percent per year and.
What is the future value.
From here we know that from the calculator we know that N equals two because we're getting paid twice and interest per year is 10% present value equals 1,000 and payment per year equals 2 sorry payment per year equals 1 and what we want to figure out is what the future value is.
You basically enter all that in first you clear the memory enter to N and then interest per year. This is not in terms of decimals. This is just percentage point.
10% per year and you currently have one thousand dollars PV and you're going to get paid once a year.
That's one payment per year redshift down shift and then P flash yr and then once you entered all the parameters you can just hit the button that you want to as you want an answer for in this case its future value and there it is 1210 and as you can see there's a negative sign in front of it these are the directions of cash flows at first we entered 1,000 depositing 1000 or you know from the bank's perspective the bank is receiving $1,000 from you and two years from now the bank must pay you one thousand two hundred ten dollars that's why there's a negative sign on it it's the other of cash flow going into the in the other direction. All right.
To see a more complicated example first let's clear the memory we don't really have to clear the memory because we're going to use the same parameters but just to remind you that to clear the memory before you do any calculations it did it anyway.
Again it's a let's say now where the interest is going to be compounded on a monthly basis.
If that were the case interest per year is still 10% and the number of payments would be 24.
Over two years you'll be paid you know on a monthly basis and payments per year is now twelve.
With that let's do 24 and ten percent Interest per year and still the PV is one thousand dollars and now there's 12 payments per year and see what the future value future value is 1200 20.39 cents pretty easy huh.
We've covered future value.
To get a future value is how much you will get or how much that your money is worth in a future date compared to what you have now now present value is completely backwards.
Say you have your good idea to receive $1000 two years from now how much is that worth in today's dollars is the objective.
Basically it's looking at the same thing but uh pressing a different button clear the memory let's assume the exact same same parameters.
10% interest and you're getting a compound 10% compound interest and you're making payments once a year say you have a thousand dollars and that's the future value.
You have hit FV and you have two payments 2n and it's 10% per year and the payment is once per year sorry.
You go 1p flash yr and you want to know what the present value is.
Hit P D that will be 826 dollars and 45 cents.
The only thing that changed from previous for the previous question was before you entered 1000 in PV now you're entering 1000 FB.
A one thousand dollar two years from now is equivalent to eight hundred twenty-six dollars and forty-five cents for in today's dollars.
The next topic is annuities these again is having the same payment over a fixed period it kind of looks like this.
Say we're receiving five hundred dollars every six months.
Five hundred dollars here five hundred dollars at the end of year one and.
On until the end of year five.
That would be ten payments and say the interest rate is 6% per year and made semi-annually alright.
The way to do. This is the calculation make sure you clear the memory and now you can see that it's clear.
It's going to be five hundred dollar payment.
Five hundred PMT and you're going to have 6% was it yeah six percent interest rate.
Six interest rate per year and then you're going to have five two payments per year.
Two payments for your P / yr and you're going to have five years.
Five times P / y bar for yr.
That's a total of ten payments and then you can just hit PV to get the present value calculation.
The present value would be four thousand two hundred sixty-five dollars and ten cents alright.
For our final chapter or when I cover NPV analysis.
Net present value is for any kind of cash flow stream you can calculate what the prison value equivalent is and that's called net present value NPV and.
Here's an example.
You invest at the beginning at year 0 you invest $10,000 on a project then the project does pretty well the first and second year it generates about $2,500 per year and then in the third year it hits the peak and generates $3500 a profit and at the end of the third year and all but on the fourth year you know the fat kind of dies and you earn $1000.
Looking at this cash cash flows what is the net present value for you like would you be interested in investing in this project or not and the assumption is there's an 8% annual interest rate compounded annually.
At this rate is it does it make sense to invest in the project and.
From using your calculator make sure you clear the cash flow memory that's a blue C 0 alright and then enter in the parameter.
It's 8% per year.
8i /yr and then we're assuming one payment per year.
One red p /yr. All right, and the way to enter a cash flow you have to enter in all the streams separately unless they're kind of equal consecutively.
Let's do this.
We're where we want to enter 10,000 negative 10,000 and then hit plus / - that makes it negative and then hit CFJ that the first cashflow just saw a cf0.
That's a first cashflow and then you want to enter in 2500 for two years.
That will be 2500 input for two periods cashflow gay that's a cash flow one and then it's 3,500 3,500 cash flow J and then 1000 cash flow J. All right.
We've entered all these cash flows and you just want to make sure to verify it before you calculate npv.
To check the CFG a input you hit our CL and CF j and if you press a plus or minus you can go back and forth though the first zero the cash flow is negative ten thousand and a it's for one period and the next cash flow is 2500 is for two periods 3500 for one period and one thousand for one period and as you can see a CF for is blank that means there's nothing beyond that you can also go back using -.
To get out of it you just hit C clear and then what you want to do is to look at the NPV it's underneath PRC.
Do the red MPD and the net present value for this project is negative two thousand twenty eight dollars and forty cents.
You're actually going to lose money let's keep these given assumptions and these kind of cash flow projections you're going to lose money two thousand dollars in today's dollar terms two thousand twenty eight dollars or forty cents.
It's better not to take take on this project because it is NPV negative alright.
That concludes my faceless tutorial value of money if you want to know further you can look at your HP calculator manual the first three topics Fe PD and Nui are in Chapter six and for more detailed cash flow analysis to do NPV and you can look at chapter 8 if you want to practice further with some more examples you can go to the HP's website of shorten it using bitly.
The address is vit ly / 1e capital x capital z NL i again it's a bitly flash 1 e capital x capital z NL i and you will find a lot of examples from from HP's website alright I hope you enjoyed it and hope you do well in the upcoming class on time value of money Thanks you.