Fundamentals of Financial Management (Concise 6th Edition)

Chapter 5 Time Value of Money 129

in one place, which makes checking data entries relatively easy. Finally, it shows
that Excel can be used to create exhibits, which are quite important in the real
world. In business, it’s often as important to explain what you are doing as it is to
“get the right answer” because if decision makers don’t understand your analysis,
they may reject your recommendations.

$115.76

A B C D E F G

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

Investment

Interest rate

No. of periods

=

=

=

=

=

=

= !$100.00

5.00%

3

CF 0

I

N

PV

Periods:

Cash Flow Time Line:

0

!$100

Step-by-Step Approach: $100 $105.00 $110.25

FV =?

1 2 3

Formula Approach: FVN = PV(1 " I)N $115.76

Calculator Approach:

In the Excel formula, the terms are entered in this sequence: interest, periods, 0 to indicate no intermediate cash

"ows, and then the PV. The data can be entered as !xed numbers or as cell references.

Excel Approach: Fixed inputs:

Cell references:

N I/YR PV PMT

3 5 !$100.00 $0

FV

$115.76

=FV(0.05,3, 0 ,! 100 ) = $115.76

=FV(C15,C16, 0 ,C14) = $115.76

FVN = $100(1.05)^3

FVN =

FVN =

=

32

Tabl e 5 - 1 Summary of Future Value Calculations

HINTS ON USING FINANCIAL CALCULATORS

When using a! nancial calculator, make sure your machine is set up as indicated here. Refer to
your calculator manual or to our calculator tutorial on the text’s web site for information on set-
ting up your calculator.

• One payment per period. Many calculators “come out of the box” assuming that 12
  payments are made per year; that is, they assume monthly payments. However, in this
  book, we generally deal with problems in which only one payment is made each year.
  Therefore, you should set your calculator at one payment per year and leave it there. See our
  tutorial or your calculator manual if you need assistance.


• End mode. With most contracts, payments are made at the end of each period. However, some
  contracts call for payments at the beginning of each period. You can switch between “End
  Mode” and “Begin Mode” depending on the problem you are solving. Because most of the prob-
  lems in this book call for end-of-period payments, you should return your calculator to End Mode
  after you work a problem where payments are made at the beginning of periods.


• Negative sign for out! ows. Out" ows must be entered as negative numbers. This generally
  means typing the out" ow as a positive number and then pressing the #/$ key to convert
  from # to $ before hitting the enter key.


• Decimal places. With most calculators, you can specify from 0 to 11 decimal places. When work-
  ing with dollars, we generally specify two decimal places. When dealing with interest rates, we
  generally specify two places when the rate is expressed as a percentage (e.g., 5.25%), but we spec-
  ify four places when the rate is expressed as a decimal (e.g., 0.0525).


• Interest rates. For arithmetic operations with a non! nancial calculator, the 0.0525 must be
  used; but with a! nancial calculator, you must enter 5.25, not .0525, because! nancial calcu-
  lators assume that rates are stated as percentages.