VIDEO ABOUT TIME VALUE MONEY

Please click the link below to watch full video
What is Future Value, Net Present Value & Annuity

CALCULATE ANNUITY USING EXCEL

i. Click the function button (fx), select Financial and double-click PMT.

Figure 7 shows the dialogue box

 ii. A dialog box appears and asks what data to use.

Figure 8 shows the formula box

iii. After fill the box with the data, the answer will show up.

Figure 9 shows the data filled in the box and the result of the formula

CALCULATE NET PRESENT VALUE USING EXCEL

i. Firstly, you have to insert the data in the column.

Figure 4 shows the data that have been insert in the column

 ii. Next, enter the formula "=NPV(B3,B3,B6)+B4" to account for that initial outlay.

Figure 5 shows formula that have benn type in the column

iii. Click enter, then the answer will come out.

Figure 6 shows the answer of the data

CALCULATE FUTURE VALUE USING EXCEL

i. Click the function button (fx), select Financial and double-click FV.

Figure 1 shows the dialog box

ii. A dialog box appears and asks what data to use.

Figure 2 shows the formula box

 iii. After fill the box with the data, the answer will show up.

Figure 3 shows the data filled in the blog and the result of the formula

CALCULATION ANNUITY USING FORMULA

PMT=FV(r)(1+r)n-

For example an individual who would like to calculate the amount they would need to save per

year to have the balance of RM5,000 after 5 years. Assumed that the effective rate per year 

would be 3%.

PMT=RM 5000(0.03)(1+0.03)5-1

PMT=RM 1500.1593

PMT=RM 941.77

BENEFITS USING ANNUITY

      Tax deferral

Annuities was the only investment that is inherently accorded tax-deferred status. Furthermore, 

annuities have no limit on the amount of money that can be placed into them and also no income 

phase out schedules advantage over Individual Retirement Account (IRAs) and qualified plans for 

wealthy investors who can shelter millions of money taxation inside these contracts. 

Guaranteed Payout

Usually annuitants that choose any type of life payout option can rest assured that they will receive

some sort of payments until they die, even if the completely exhaust the value of the contract

beforehand.

Protection from probate and creditors

Generally annuity contract are exempt from creditors in most cases and are unconditionally exempt from

probate proceedings nationwide. Sometimes exemption from creditors can vary somewhat from 

one state to another.

WHAT IS ANNUITY?

Annuity definition

 -          a fixed sum of money paid to someone each year, typically for the rest of their life.
-          a form of insurance or investment entitling the investor to a series of annual sums.

CALCULATION NET PRESENT VALUE USING FORMULA

NPV = C * {(1 - (1 + R) ^ -T) / R} − Initial Investment

where C is the expected cash flow per period, R is the required rate of return and T is the number of periods over which the project is expected to generate income.

For example, consider two potential projects for company ABC:

Project X requires an initial investment of $35,000 but is expected to generate revenues of $10,000, $27,000 and $19,000 after the first, second and third years, respectively. The target rate of return is 12%. Since the cash inflows are uneven, the second formula listed above is used.

NPV = {$10,000 / (1 + 0.12) ^ 1} + {$27,000 / (1 + 0.12) ^ 1} + {$19,000 / (1 + 0.12) ^ 1} - $35,000
NPV = $8,929 + $21,524 + $13,524 - $35,000
NPV = $8,977

Project Y also requires a $35,000 initial investment and will generate $27,000 per year for two years. The target rate remains 12%. Because each period produces equal revenues, the first formula above can be used.

NPV = $27,000 * {1 - (1 + 0.12) ^ -2} - $35,000
NPV = $45,631 - $35,000
NPV = $10,631

Despite the fact that both projects require the same initial investment and Project X actually generates more total income than Project Y, the latter project has a higher NPV because income is generated faster, meaning the discount rate has a smaller effect.

ADVANTAGES OF NET PRESENT VALUE

Accurate method used to access business investment viability

It is measured for its long-term survival and its ability to have sustainable profits over a period of time.

Net Present Value uses discounted cash flow to accurately quantity the net benefits from a projects

The cash flows are the amounts and timings of the various investment costs and benefits. It is also brought into a common term, so that the net benefits can be quantified and be compared if necessary to competing investment oppotunities.

NET PRESENT VALUE

NPV definition

The present of a sum of money, in contrast to some of future value which is it has been invested at compound interest. In addition, discounted value of the expected costs of an investment are deducted from the discounted value of the expected returns.

HOW TO CALCULATE FUTURE VALUE

There are two ways to calculate future value which is by using simple annual interest and annual compound interest.

Simple Annual Interest

Future Value = Present Value x [1 + (Interest Rate x Number of Years)]

For example, Bob invests $1,000 for five years with an interest rate of 10%. The future value would be $1,500.

Future Value = $1,000 x [1 + (0.1 x 5)]

Future Value = $1,000 x 1.5

Future Value = $1,500

Annual Compound Interest

Future Value = Present Value x [(1 + Interest Rate) ^{Number of Years}]

For example, John invests $1,000 for five years with an interest rate of 10%, compounded annually. The future value of John's investment would be $1,610.51.

Future Value = $1,000 x [(1 + 0.1)⁵]

Future Value = $1,000 x 1.61051

Future Value = $1,610.51

NOTE: important to remember that simple interest is always based on the present value, whereas compounded interest means that the present value grows exponentially each year.

ADVANTAGES OF FUTURE VALUE

Advantages of Future Value 

the high degree of security that investors enjoy 

 The corporations and investors enjoy three main benefits from organized security exchanges. First is a continuous market, which is leads to continuous security prices. Second is establishes and publishes fair security prices based on supply and demand rather than bargaining. Third is organized security exchanges. It is also help business raise new capital because the secondary market makes it easier for firms to float new security offerings successfully..

Low returns which is the limited returns it can generate

The more significant downside to future value investing is the limited returns it can generate. Interest rate of bank grows an investment to its future value but can only provides a small return compared to more lucrative investment with higher risks likes stocks, bonds and certificate of deposits.

Time and the Risks of Inflation

They are very different from investment in stock that can generate larger returns or create a larger losses in a matter of hours and days. Usually future value investment are measured in months and years. This can creates risks due to inflation.

  

WHAT IS FUTURE VALUE?

Future Value definition

• It always refers to a method of calculating how much the present value (PV) of an asset or cash will be worth at a specific time in the future.
• It is to measures the nominal future sum of money that a given sum of money is "worth" at a specified time in the future assuming a certain interest rate, or more generally, rate of return; it is the present value multiplied by the accumulation function.

-