Time Value of Money Assignment

Resource & Review

Thetime value of money is one of the most important concepts in finance.So many decisions are made based upon this concept. This assignmentprovides an opportunity for learning and practicing some of the basictime value of money formulas.

The time value of money is basedupon the premise that a dollar today is not worth the same as a dollarin the future or in the past.

The following examples use aHP-12C financial calculator. You might have to modify for differentcalculators. However, you can get the same answer by using tables orExcel.

Note: Excel is required for thisassignment. There are two Excel help files provided for yourconvenience. Please use the attached spreadsheet provide by myinstructor.

• If you put $500 in a savings account today at 12% interest, what will it be worth in 5 years?
• Try the same problem compounding interest on a quarterly basis.
• Youwant $10,000 in your account at the end of 10 years. What do you haveto put into your account today in order to achieve your goal if youraccount pays 8% interest?
• Let’s try the number 3. Take your answer (PV), FV, and n — and try to solve for i. You should get the answer of 8.
• If you put $500 in a savings account at the end of each year at 12% interest, what will it be worth in 5 years?
• If you put $10,000 in your account at the end of every year for 10 years, what is it worth now if your account pays 8% interest?

Hint: This is a future value problem.

Calculator keystrokes: 500 press PV

12 press i

5 press n

to solve ___ press FV

Hint: This is a present value problem.

Calculator keystrokes: 10,000 press FV

8 press i

10 press n

to solve ___ press PV

AnotherHint: Be sure to clear everything out of financial memory beforecontinuing. (f key, then the fin key; note the clx key only clears theregister, not the memory.)

Hint: When solving for i or n, be sure to enter either the FV or the PV as a negative or you will get an error.

With the above items, we have computed two of the four basic time value of money problems—future value and present value.

Thenext two problems are similar—they are called annuities. In a storyproblem, it is easy to detect an annuity. You should look for the words”each” or “every.” See if you can detect them in problems 5 and 6, whichare similar to Problems 1 through 4.

Hint: This is a future value of an annuity problem.

Calculator keystrokes: 500 press PMT

12 press i

5 press n

to solve ___ press FV

Hint: This is a present value of an annuity problem.

Calculator keystrokes: 10,000 press PMT

8 press i

10 press n

to solve ___ press PV

There are different ways to solve for these types of problems.

Calculation Analysis

Theabove examples were given in a calculator format, where it is easy tosee what is required. Now, calculate the above 6 items in MicrosoftExcel.

Note: Use the two Excel help files to assist you in understanding the Time Value of Money Process.

Written Analysis

Answer the following questions in the Excel Spreadsheet after completing the computations:

• Why is the time value of money concept important to a nonprofit’s fiscal health?
• Ifyou were the executive director of a small nonprofit offeringprogrammatic technical assistance to other nonprofits, when would youuse cost-benefit analysis?