Time Value of Money Assignment

Resource & Review

The time value of money is one of the most important concepts in finance. So many decisions are made based upon this concept. This assignment provides an opportunity for learning and practicing some of the basic time value of money formulas.

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

The following examples use a HP-12C financial calculator. You might have to modify for different calculators. However, you can get the same answer by using tables or Excel.

Note: Excel is required for this assignment. There are two Excel help files provided for your convenience. Please use the attached spreadsheet provide by my instructor.

• 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.
• You want $10,000 in your account at the end of 10 years. What do you have to put into your account today in order to achieve your goal if your account 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

Another Hint: Be sure to clear everything out of financial memory before continuing. (f key, then the fin key; note the clx key only clears the register, 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.

The next two problems are similar—they are called annuities. In a story problem, 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, which are 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

The above examples were given in a calculator format, where it is easy to see what is required. Now, calculate the above 6 items in Microsoft Excel.

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?
• If you were the executive director of a small nonprofit offering programmatic technical assistance to other nonprofits, when would you use cost-benefit analysis?