Time Value of Money
Using Excel
Cash Flow Analysis for Annuities: Savings Plans, Asset Valuation, Retirement Plans and
Mortgage Loan. FV, PV and PMT.
Topics
1) Cash Flow Pattern Diagram for Future Value and Present Value of Irregular Cash Flows ................................................... 2
2) Future Value Calculation of Savings Plan with Irregular Cash Flows, Hand Drawings & Diagram ........................................ 3
3) Excel Example 1: Calculate Future Value of Savings Plan with Irregular Cash Flows............................................................ 4
4) Present Value Calculation of Irregular Future Cash Flows. Asset Valuation Calculation. Hand Drawings & Diagram ......... 5
5) Excel Example 2: Calculate Present Value of Irregular Future Cash Flows to determine Asset Valuation ........................... 7
6) Cash Flow Pattern Diagram for Future Value and Present Value of Periodic Cash Flows .................................................... 8
7) If We have Regular or Periodic Cash Flows, rather than Irregular Cash Flows, our Calculations for a FV or PV Amount are
Much Easier!!! .............................................................................................................................................................................. 8
8) Define Terms for an Annuity................................................................................................................................................. 9
9) Terms & Variables for Annuity Calculations ....................................................................................................................... 10
10) Formulas for Calculating Future Value of an End Annuity .................................................................................................. 10
11) Excel Example 3: Calculate Future Value for Savings Plan with Periodic Cash Flow in an End Annuity ............................. 11
12) Formulas for Calculating Present Value of an End Annuity ................................................................................................ 12
13) Excel Example 4: Calculate Present Value of Future Periodic Cash Flows (End Annuity) to determine Asset Valuation ... 13
14) Cash Flow Pattern Diagram for Future Value and Present Value Annuities when we are Solving for the PMT (Periodic
Cash Flow) Amount..................................................................................................................................................................... 14
15) Formulas for Calculating the PMT Value in an End Annuity When Present Value is Known .............................................. 16
16) Excel Example 5: Calculate PMT When Present Value Amount is Known. How Much Can We Withdraw at End of Each
Month for Next 30 Years?........................................................................................................................................................... 17
17) Formulas for Calculating the PMT Value in an End Annuity When Future Value is Known ............................................... 18
18) Excel Example 6: Calculate PMT When Future Value Amount is Known. How Much Should I Deposit at the End of Each
Month to Become Millionaire?................................................................................................................................................... 19
19) Excel Example 7: Calculate PMT For a Home Mortgage Loan, Where Loan is Positive Present Value Amount. ................ 20
20) Summary of Annuity Formulas: .......................................................................................................................................... 21
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1) Cash Flow Pattern Diagram for Future Value and Present Value of Irregular Cash Flows
Example 1: Below is a picture of Cash Flows from a Savings Plan. What is Future Value of Savings Plan?
Example 2: Below is a picture of Cash Flows a New Machine can Earn. How Much should we pay for such a machine?
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2) Future Value Calculation of Savings Plan with Irregular Cash Flows, Hand Drawings & Diagram.
If we are depositing amounts of money into our bank account at the end of each few years (not each year), we can
make a Future Value Calculation on each individual amount to calculate what each Lump Sum’s Future Value is for
each deposited amount, and then add them to get the Total Future Amount in our Bank Account.
Define “Irregular Cash Flows”
o The Cash Flow Amounts are called “Irregular” because the amounts are not the same each period and the
time between each cash flow is not the same. This is to distinguish the Cash Flows from Regular or Periodic
Cash flows, which are equal in amount each period and the time between each amount in equal.
The below picture illustrates how each deposited amount is an individual Present Value Lump Sum Amount that we
must use to calculate its Future Value amount. When we add the Future Value amounts we get the amount in the
bank account at the end of all the periods.
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3) Excel Example 1: Calculate Future Value of Savings Plan with Irregular Cash Flows.
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4) Present Value Calculation of Irregular Future Cash Flows. Asset Valuation Calculation. Hand Drawings
& Diagram.
In this example, a company has estimated that a new machine they are considering buying will generate future
profit (Cash Flows) for the company, as see here:
Irregular Cash Flows the
Machine will Generate,
Years Date each is a FV amount
0 12/31/2017
1 12/31/2018 $50,000.00
2 12/31/2019
3 12/31/2020 $25,000.00
4 12/31/2021
5 12/31/2022 $50,000.00
6 12/31/2023
7 12/31/2024
8 12/31/2025 $10,000.00
If the Company has to earn an Annual Interest Rate or Rate of Return of 17% once they buy the machine, we can
estimate what the new machine should cost by calculating the Present Value Amount for each Lump Sum Future
Value Amount. In Essence, for each FV Lump Sum Cash Flow, we can “discount it back to Time 0”, taking all of the
interest that we expect to earn, and then add the Present Value amounts to estimate that maximum we should pay
for the machine. This example is illustrated in the diagram on the next page.
Terms:
o Asset = Something we own or control that brings benefit to the company, like cash.
o Time 0 (Time Zero) is the time when we buy the asset.
o “discount back to time 0” = remove all the assumed interest from a FV Amount to get the PV Amount at
Time 0.
o Asset Valuation Calculation = discount all future cash flows that asset will generate back to Time 0 so you
can estimate the maximum amount that should be paid for the asset.
o Future Cash Flows = Each Cash Flow in the future is an estimate at a point in time that considers all the cash
flows in and all the cash flows out. It is an estimate of the cash flow profit from the asset.
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5) Excel Example 2: Calculate Present Value of Irregular Future Cash Flows to determine Asset Valuation.
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6) Cash Flow Pattern Diagram for Future Value and Present Value of Periodic Cash Flows
7) If We have Regular or Periodic Cash Flows, rather than Irregular Cash Flows, our Calculations for a FV
or PV Amount are Much Easier!!!
Regular Cash Flows are defined as Cash Flows that are the same amount each period and the time between each
cash flow is the same. When you have a cash flow pattern like this, it is called an Annuity. Regular Cash Flows are
also called Periodic Cash Flows or Periodic Payments.
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8) Define Terms for an Annuity
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9) Terms & Variables for Annuity Calculations
Financial Variable Name Math Symbol Excel Function Argument
Annual Rate (APR), Discount Rate,
Rate of Return i
Compounding Periods per year n
Years x
Period Rate i/n rate
Total Number of Compounding Periods x*n nper
Present Value PV pv
Future Value FV fv
Periodic Cash Flow / Periodic Payment PMT pmt
** PV, FV and pmt arguments in Excel must have the correct Cash Flow Direction.
10) Formulas for Calculating Future Value of an End Annuity
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11) Excel Example 3: Calculate Future Value for Savings Plan with Periodic Cash Flow in an End Annuity.
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12) Formulas for Calculating Present Value of an End Annuity
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13) Excel Example 4: Calculate Present Value of Future Periodic Cash Flows (End Annuity) to determine Asset Valuation.
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14) Cash Flow Pattern Diagram for Future Value and Present Value Annuities when we are Solving for the
PMT (Periodic Cash Flow) Amount
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15) Formulas for Calculating the PMT Value in an End Annuity When Present Value is Known
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16) Excel Example 5: Calculate PMT When Present Value Amount is Known. How Much Can We Withdraw at End of Each Month for Next 30
Years?
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17) Formulas for Calculating the PMT Value in an End Annuity When Future Value is Known
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18) Excel Example 6: Calculate PMT When Future Value Amount is Known. How Much Should I Deposit at the End of Each Month to Become
Millionaire?
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19) Excel Example 7: Calculate PMT For a Home Mortgage Loan, Where Loan is Positive Present Value Amount.
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20) Summary of Annuity Formulas:
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