Chapter 1: The time value of money* minor bug fix: September 9, 2003 Chapter contents Overview......................................................................................................................................... 2 1.1. Future value ............................................................................................................................ 3 1.2. Present value ......................................................................................................................... 18 1.3. Net present value................................................................................................................... 26 1.4. The internal rate of return (IRR)........................................................................................... 32 1.5. What does IRR mean? Loan tables and investment amortization ....................................... 37 1.7. Saving for the future—buying a car for Mario ..................................................................... 40 1.8. Saving for the future—more realistic problems.................................................................... 42 1.9. Computing annual “flat” payments on a loan—Excel’s PMT function ............................... 49 1.10. How long will it take to pay off a loan?.............................................................................. 51 1.11. An Excel note—building good financial models................................................................ 53 Summing up .................................................................................................................................. 55 Exercises ....................................................................................................................................... 57 Appendix: Algebraic Present Value Formulas ............................................................................ 69 * Notice: This is a preliminary draft of a chapter of Principles of Finance with Excel by Simon Benninga (
[email protected]). Check with the author before distributing this draft (though you will probably get permission). Make sure the material is updated before distributing it. All the material is copyright and the rights belong to the author. PFE Chapter 1, Time value of money page 1 Overview This chapter deals with the most basic concepts in finance: future value, present va