Time value of money and financial calculator tutorials
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Time value of money and financial calculator tutorials
Once in a while, not often, it is useful to do calculations in real dollars (or any other currency). For example, when planning for retirement it may be easier to think in real terms, because you are used to thinking in terms of the money that you currently earn. Let’s start with some definitions: So, nominal interest rates are what…
This article explains how to calculate lease payments, focusing on equipment leases. It covers basic payment calculations, factoring in residual value and monthly payments. It also explores the complexities of advance payments, where part of the payment is made upfront. The article provides formulas and examples for calculating lease payments both with and without advance payments. For leases with advance payments, it emphasizes how these reduce the total lease amount and payment periods. The tutorial also mentions tools like financial calculators and Excel spreadsheets to simplify the process.
In the previous tutorial, we saw how to calculate the future value of an annuity. Here, we will instead find the present value of a regular annuity. There are many examples where you might want to find the present value of an annuity: A regular annuity is simply an annuity where the first payment is made at the end of…
An annuity is a series of equal cash flows, equally distributed over time. Examples of annuities abound: Mortgage payments, car loan payments, leases, rent payments, insurance payouts, and so on. If you are paying or receiving the same amount of money every month (or week, or year, or whatever time frame), then you have an annuity. A regular annuity is…
In the previous sections, we have seen how to calculate present values and future values of lump sum cash flows. However, in many cases you may need to solve for the number of periods or the interest rate. The purpose of this section is to show exactly how to do that. It is important to remember that we are using…
On the previous page, you learned everything that you will ever need to know in order to solve time value of money problems! That’s quite a bold statement, but it is true. The key is that we derived the basic time value of money formula: $$F{V_N}=PV(1+i)^N$$ From that formula, we can easily derive other formulas for solving for any of…
These are the main formulas that are needed to work with regular annuity cash flows (Definition/Tutorial). Please note that these formulas work only on a payment date, not between payment dates. This is the same restriction used (but not stated) in financial calculators and spreadsheet functions. I use MathJax to display these formulas. You can click the equations to show…
These are the main formulas that are needed to work with regular annuity cash flows (Definition/Tutorial). Please note that these formulas work only on a payment date, not between payment dates. This is the same restriction used (but not stated) in financial calculators and spreadsheet functions. I use MathJax to display these formulas. You can click the equations to show…
These are the main formulas that are needed to work with lump sum cash flows (Definition/Tutorial). I use MathJax to display these formulas. You can click the equations to show a zoomed version in a pop-up, or right-click on the formulas for additional options (e.g., to copy the equation as $\TeX$ or to choose the zoom settings). To Solve For:…
The following pages show the most common formulas that you will need to solve time value of money problems. A key to the variable definitions is at the bottom of each page. Please note that there is no explanation of the formulas on these pages. These are just formula pages. You must have JavaScript enabled in your browser for this…
The most basic type of cash flow is a lump sum. That is, a single cash flow that occurs at a single point in time. Despite its simplicity, the lump sum cash flow is the bedrock upon which all other types of cash flows are built. According to the principal of value additivity, every type of cash flow stream can…
One of the biggest obstacles to correctly solving time value of money problems is identifying the cash flows and their timing. On this page I will offer some tips that I hope will be helpful. There are Always Five Variables Every time value of money problem has five variables: Present value (PV), future value (FV), number of periods (N), interest…
One of the most fundamental concepts in finance is that money has a “time value.” That is to say that money in hand today is worth more than money that is expected to be received in the future. The reason is straightforward: A dollar that you receive today can be invested such that you will have more than a dollar…