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Computing the future value of an investment

From: Excel 2007: Financial Analysis

Video: Computing the future value of an investment

One of the more conservative investment strategies available is to purchase an instrument such as a certificate of deposit or fixed rate annuity that enables investors to trade lower risk for relatively low but known rates of return. You can evaluate this type of investment using the future value or FV function. The FV function takes five arguments, rate, number of periods, payment, present value and type. The rate is the annual percentage rate divided by the number of periods in a year.

Computing the future value of an investment

One of the more conservative investment strategies available is to purchase an instrument such as a certificate of deposit or fixed rate annuity that enables investors to trade lower risk for relatively low but known rates of return. You can evaluate this type of investment using the future value or FV function. The FV function takes five arguments, rate, number of periods, payment, present value and type. The rate is the annual percentage rate divided by the number of periods in a year.

Usually, that's 12 representing 12 months. NPER is the number of periods in the investment. That's usually the number of years times the number of periods per year. So a ten-year investment would have 120 periods. PMT or Payment is the amount of money paid into the investment each period if any. PV is the starting value of the investment and type indicates whether the payment is due at the beginning of a period, in which case the value is 0 or omitted or at the end of the period, in which case the value is 1.

If you leave out the Payment argument, you must include a PV or Present Value to indicate the starting principal balance. So let's take a look at the formula that I have in my worksheet. I have a rate of 6%, a term of 5 years and also in this case, we have a payment of $10,000 a month and a present value of $100,000. So what that indicates is that we have an initial starting balance of $100,000 in this investment and then we'll be adding monthly payments of $10,000 to the investment.

Now, any money you pay into the investment is expressed as a negative number because it's a cash flow from your account. Therefore, it decreases your net worth by that amount so it's expressed as a negative number. In this case, the payment in PV arguments will have negative values. If you were to take money out each month, the PMT value would be positive. One such case would be if you created a retirement account and started taking disbursement after age 55. In that case, you would input the present value as a negative number and express the PMT or payment as a positive number to indicate how much money you drew from the account each month.

So let's see what the future value of this investment would be. We start with the FV function and we begin entering our arguments. So we have a rate in cell B3 of 6% but in this example, interest is compounded monthly. So we divide by 12 the number of months in a year, then we enter the number of periods. That is based on the value in cell B4, the term of the loan or the investment. But because we are using the number of periods as oppose to the number of years, we multiply 5, the value in B4, by 12.

So we get the number of months the number of times that interest is compounded. Then we have the monthly payment, which is in cell B5. The present value which is in cell B6 and because we are going with the default type where payments were due at the beginning of the period, as oppose to the end, we can just leave the Type argument blank and there you have it. If you start a loan or an investment with the present value of $100,000 at $10,000 per month, at an annual rate of 6%, at the end of five years, you will have over $832,000.

The FV function offers investors a straightforward means of evaluating the fixed rate investment. What's more? It gives analyst the ability to evaluate annuities for the beneficiary he receives periodic payments.

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Excel 2007: Financial Analysis

51 video lessons · 13789 viewers

Curt Frye
Author

 
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  1. 2m 6s
    1. Welcome
      1m 8s
    2. Using the exercise files
      32s
    3. Disclaimer
      26s
  2. 13m 20s
    1. Separating inputs and formulas
      2m 2s
    2. Avoiding common mistakes
      5m 39s
    3. Tracing formula precedents and dependents
      2m 52s
    4. Evaluating Excel formulas step by step
      2m 47s
  3. 18m 40s
    1. Tracking income and expenses using an Excel table
      3m 29s
    2. Creating a Pivot Table from table data
      3m 36s
    3. Pivoting a Pivot Table
      2m 22s
    4. Filtering a Pivot Table
      3m 11s
    5. Adding Pivot Table columns to enhance data analysis
      3m 5s
    6. Tracking cash flow using a Pivot Chart
      2m 57s
  4. 18m 48s
    1. Reading a corporate financial statement
      6m 1s
    2. Introducing common-sizing strategies for analyzing financial statements
      3m 59s
    3. Creating common-sized income statements
      3m 1s
    4. Creating common-sized balance sheets
      2m 53s
    5. Calculating percentage changes in financial statements
      2m 54s
  5. 8m 12s
    1. Calculating earnings per share
      1m 54s
    2. Calculating return on equity and return on assets
      2m 50s
    3. Calculating gross profit margin and net profit margin
      3m 28s
  6. 6m 19s
    1. Calculating the current ratio and quick ratio
      2m 47s
    2. Calculating the average collection period
      1m 56s
    3. Calculating inventory turnover
      1m 36s
  7. 6m 12s
    1. Calculating the equity ratio
      1m 26s
    2. Calculating the debt ratio
      2m 57s
    3. Calculating the times interest earned ratio
      1m 49s
  8. 10m 58s
    1. Calculating simple interest and compound interest
      3m 36s
    2. Applying nominal versus effective interest rates (APR versus APY)
      3m 21s
    3. Calculating the number of days between events
      4m 1s
  9. 13m 32s
    1. Computing the future value of an investment
      3m 30s
    2. Calculating present value
      2m 29s
    3. Calculating net present value
      2m 42s
    4. Calculating internal rate of return
      2m 24s
    5. Calculating NPV and IRR for uneven input periods (XNPV and XIRR)
      2m 27s
  10. 7m 30s
    1. Projecting future results using the Forecast function
      2m 9s
    2. Performing quick forecasts using the Fill handle
      2m 57s
    3. Adding a trendline to a chart
      2m 24s
  11. 22m 28s
    1. Introducing amortization
      2m 20s
    2. Calculating payments on a fully amortized loan
      2m 21s
    3. Calculating payments on a partially amortized loan (balloon payments)
      2m 4s
    4. Calculating interest and principal components of loan repayments
      5m 32s
    5. Introducing depreciation
      2m 1s
    6. Calculating straight line depreciation
      1m 30s
    7. Calculating declining balance depreciation
      3m 24s
    8. Calculating double declining balance depreciation
      3m 16s
  12. 9m 34s
    1. Introducing bonds and bond terminology
      1m 37s
    2. Calculating a bond's yield
      2m 15s
    3. Calculating the value of zero coupon bonds
      3m 18s
    4. Pricing bonds to be offered to investors
      2m 24s
  13. 23s
    1. Goodbye
      23s

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