Learn Time Money of Value on Excelsheet: Free

May 6, 2012 CFP Exam Prep

Learn Time Value of Money on Excel:

Time value of money (TVM) plays an important role in Financial Planning and it is one of the most important topic
of CFP Exam. One can do TVM calculations on Calculator as well as on Excelsheet.
At IMS Proschool , we highly recommend every one to use Excelsheet to solve TVM Calculations. Because in the
exam , with the help of excelsheet you can do all the calculations much faster, moreover you dont have to
remember any formula.
Apart from Exam, if you know TVM calculations on Excelsheet, then you can also prepare Financial Plan of your
client easily. In this post, we have given tutorials on Basics of TVM on Excelsheet . It will help you to learn all
the essentials caculation on excelsheet.
Financial Planning Mathematics:
Mr. Ravi is an investor who is going to meet his Financial Planner for advice. Before meeting him, he has noted
down few questions that he would like to ask his financial Planner:
1.

I want to go abroad for which I will need 2 lacks after 5 years. How much I need to invest every year to get the
required amount after 5 years (assuming a return of 12% p.a)?

2.

How much I need to save every year to build a fund for my retirement expenses?

3.

If I save 5000 every month how much I will able to save in next 20 years for my daughter marriage?
These are some of the most common questions that you face day to day life. To answer these questions, knowing
Basics of Time Value of Money or Financial Planning Mathematics is very important.
Time Value of Money: Concept and Calculation
One of the most fundamental concepts in finance is that money has a time value. That is to say that money in hand
today is worth more than money that is expected to be received in the future. This leads us to summarize the concept
of time value: A Rupee today is worth more than a Rupee tomorrow.
The purpose of this chapter is to introduce you to the concepts, terminology, and mathematics of the time value of
money. Understanding this topic is crucial in understanding and calculating all sorts of financial questions in
personal finance in general and investments in particular.
1. Time Value of Money for Even Cash flows
Future Value (FV)
This term refers to the value of a present cash flow (or series of cash flows) at a future date. Any cash flow that is
scheduled to occur sometime later than today is referred to as a future value. Literally translated, future value
means what would be worth of todays 1 at some future point? For example, if an investment promises to pay 100
one year from now, then the 100 is the future value of the investment because that investment will be worth 100 at
that point in time. Or if you deposit 500 every year for next ten years to get 7000 after 10 years, then the 7, 000 is
the FV.
Present Value (PV)

This term refers to the current (todays) value of a single or series of future cash flows. In other words, it is the
amount that you would be willing to pay today in order to receive a cash flow (or a series of them) in the future. For
example, if you invest 50,000 and get 100,000 after 5 years, then 50,000 is the present value of the investment or if
you deposit 10,000 to get 2000 for next 7 years, then 10,000 is the present value.
Number of Periods (NPER)
The total number of periods is a key variable in all time value of money questions. It is important to distinguish
between the number of periods and the number of years. For example, when we refer to a 30-year Home Loan we
are talking of 360 months or periods of repayment and not 30 years.
Payment (PMT)
The payment is a series of cash flows. Typically, payment refers to all types of the cash flow in an annuity. For
example, if you deposit 500 every year for next 10 years to get 20, 000. Then, 500 is the payment (PMT). Common
examples of Annuity/Payment are EMI, Pension, and Systematic Investment Plan (SIP) etc
Rate
This is the rate that is used for compounding or discounting the future values or present values. For example, if you
deposit 10, 000 and earn 12% pa on your deposit, then 12% pa is the Rate.
Interest can be calculated in two ways:
1.

Simple Interest
This is when interest is calculated only on the principal amount.
SI = PV x R x T
Where,
SI = Simple Interest
R = Rate of Interest
T = Time period
For example, if you deposit 100 for 2 years at an interest rate of 8% p.a., then after one year, the interest you will
earn would be: 100 x 8% = 8 and after 2 years : 100 x 8% x 2 =16
2. Compound Interest
This is when the earned interest is also reinvested along with the principal and one receives interest on interest. For
example, if you deposit 100 for 2 years at interest rate of 8% p.a., then after one year, the interest you will earn
would be: 100 x 8% = 8
For the next year, you will not only earn interest on 100 but also on the interest that you earned in the first year
i.e 8 and therefore you will earn interest on 108.
108 x 8% = 8.64

The generalized formula for calculating future value at compound interest can be stated as below:
FV = PV (1 + R) T
= 100(1 + 8/100) ^2
= 108.64
Note:
In all the time value of money calculation, if rate is given 8% pa then it means 8%pa compounded annually (Unless,
Simple interest is mentioned in the question)
Check your progress:1
Write the TMV terminology that you need to use to get the answer.
For Example: After how many years your deposit of 12, 000 will become 20, 000 @15%.
Answer: NPER

1.

Now Solve :
You need 5,000 after 5 years. How much you need to deposit today? ___________

2.

You need 500 every year for the next five years. How much you should deposit today? ______________

3.

You invest 1, 000 every year for next 20 years. How much amount you will have after 20 years?
___________________

4.

How much you have to deposit every year to get 5000 after 5 years @12% pa_______________
How to Solve Time Value of Money (TMV) questions using Excel Functions:
Benefits of Excel over Financial Calculator
In the exam, you can use either Financial Calculator or Excel for solving TMV problems, but we strongly
recommend students to use Excel to solve TMV problems because

1.

Easy to remember: All the formulas are given in Excel Fx

2.

Faster approach:

3.

Easy to verify

4.

Critical problem: Problems like Loan amortization are easy to solve on Excel sheet.

5.

Presentation Advantage: Financial calculations can be presented to the clients on Excel sheet.

6.

Record keeping: All the calculation done on Excel sheet can be saved for future reference. More over for similar
problems you just have to change the figures.
To start solving TMV problem using Excel Functions: open Excel on your Computer System
1.

Click Fx on your excel sheet:

2. Select a category: Financial

3. Select a Function: Select a function as per the requirement of Question. For example, if you
want to find out the amount to deposit today so as to get 10,000 after 5 years, then double
click on PV:

Time Value of Money Calculations:

1. How much amount you have to deposit to get 10, 00,000 after 10 years @12% pa.?
Explanation:
PV =?
Rate: 12%
NPER: 10
FV: 1000000
Ans: 321973
2. Calculate the maturity amount, if one invests 100, 000 today for a period of 20 years @12%
pa?
Explanation:
FV =?
Rate: 12%
NPER: 20
PV: -100,000 (Here negative sign denotes an outflow)
Ans: 9,64,629

Note:
Whenever one is depositing/investing money , an outflow of cash occurs from ones pocket,
then a negative sign precedes the amount. For example, in the above question, we have deposited
100,000, so put negative sign before it i.e. -100,000. If you will receive some amount, then you
dont have to put any sign before that, because any figure without sign is always considers as
positive. For example in the 1st Example, we have put 1000,000 in FV rather than +1000,000.
3. How many years will it take to become 200,000 if you deposit 50,000 @15% pa.?
Explanation:
Nper = ?
Rate: 15%
PV: -50000
FV: 200000

Ans: 9.9 years

4. At which rate of return your investment of 200,000 becomes 500,000 in 12 years?
Explanation:
Rate:?

NPER: 12
PV: -200000
FV: 500000

Ans: 7.9%
5.A Calculate the amount you will get after 5 years, if you deposit 100 at the end of every year
for five years at 12% pa. ?
Explanation :
FV = ?
PMT: 100
Rate: 12%
NPER: 5

Ans: 635.28
5.B Calculate the amount you will get if you deposit 100 at the beginning of every year for five
years @ 12% pa.

Explanation:
Rate: 12%
NPER: 5
PMT: 100
Type: 1

Ans: 711.52

Note:
In all Annuity/payment questions Type plays an important role.
In the question no 5 A, when you deposit 100 at the end of every year for 5 years, then in
Type you have to put value 0 or simply omit it. This type of Annuity is called
Ordinary Annuity
b. In the question no. 5 B, when you deposit 100 every year at the beginning for the next 5
years, and then in Type you have to put value 1. Type 1 means payment at the beginning
of the year.This type of Annuity is called Annuity Due
a.

Check Your Progress II

Solve the Following problems using excel sheet:
1. If you were to invest100 for a period of 5 years at an interest rate of 10% p.a., how much
would you have accumulated at the end of this time period?_______________________
2.X is planning to send his daughter to college 18 years from now and will need 100,000 at that
time in order to pay for her tuition fee. Given annual rate of return of 8% per year, how much
money he needs to invest today as a lump sum to achieve the goal? _______________________

3.X has an amount of 1,250 today and would like to know how long it will take to double it
to2,500. Assume that he can earn 9% return p.a __________________________
4.X planning to send his son to college 18 years from now and will need 100,000 at that time in
order to pay for tuition, room and board, party supplies, etc. If he has 20,000 to invest today,
what compound average annual rate of return is required to meet the goal?
_________________________
5.Suppose that you are offered an investment that will pay you 1,000 per year (end of year) for
10 years. If you can earn a rate of 9% per year on similar investments, how much should you be
willing to pay for this annuity?_________________________

2. TMV for Uneven cash flows

Internal Rate of Return:
You are investing 20,000 in a fund which will give back 5000 for next five years. How much
rate of return you are deriving from this investment?
To answer this, you will use Rate =rate (5,5000,-20000)
Now, suppose you are investing 20,000 and will get 6,000 after one year, 8,000 after two years
and 10,000 after 3 years. How much rate of return you are getting in the above investment
To solve the above problem, you cant use Rate function as the cash flows are uneven. To get
the rate of return of uneven cash flow, you have to use Internal Rate of Return (IRR) function

Ans: 8.9%
Solution of Check your progress 1:
1. PV
2. PV
3. FV
4. PMT
Solution of check your progress 2.

1. 161.051 =FV(10%,5,,-100)
2. -25024.90 =PV(8%,18,,100000)
3. 8.043 =NPER(9%,,-1250,2500)
4. 0.093 =RATE(18,,-20000,100000)
5. -6417.65 =PV(9%,10,1000)