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iFinance User Guide

  1. Time Value of Money (TVM)
  2. Internal Rate of Return (IRR) and Net Present Value (NPV)
  3. Property
  4. 401k/IRA
  5. Credit Card

Time Value of Money (TVM)

The time value of money (TVM) is an economic principle that a dollar received today has greater value than a dollar received in the future. The following questions are important to know.

  • What will an investment today be worth in the future?
  • What is a payment to be received in the future worth today?

Compounding is the process of determining the future value (FV) of an investment made today (PV) and/or a series of equal payments made each period (PMT). It assumes that interest that is earned is reinvested to earn additional interest over the life of the investment. Discounting is the process of determining the present value (PV) of money to be received in the future (FV or PMT) as a lump sum or payments. PV is the lump sum amount received today of all future cash flow benefits discounted back to the present at a discount rate.

  • PV is a single sum of money today - can be positive or negative
  • PMT is equal to periodic amounts, received or paid each period - received means positive payments, payments are negative
  • FV is a one-time sum of money to be received or paid in the future. FV is positive when money is received and negative when money is paid
  • Pay at beginning of period = ON if a payment is made at the beginning of each period (month, year, etc) and OFF at the end (default is OFF)
  • Years N - number of years
  • Periods per Year P/YR - number of compounding/discount periods per year
  • n= N * P/YR this is the number of compounding and discounting periods
  • I/YR is the annual interest rate

TVM Examples

Example 1 - Compute FV - Single amount in the Future Value

CD certificate of deposit where money deposited remains in the account and interest is earned until the CD matures or investment where funds are invested and not withdrawn until the investment is sold. Investor buys land $100,000 (PV) and the property increases in value by 9% per year. What is it worth at the end of the 10th year?

Inputs PV = -100,000 PMT= 0 I/YR = 9% P/YR=1 Pay at beg of period=OFF Years=10 FV=?

Results n=10 FV = 236,736

Example 2 - Compute FV - Compound an Annuity into a Future Value

Rent or Lease payments or recurring deposit situations - annuities. Investor deposits $10,000 (PMT) at the end of the year for the next 10 years earning 10% compounded. What is it worth at the end of the 10th year?

Inputs PV= 0 PMT =-10,000 I/YR = 10% P/YR=1 Pay at beg of period=OFF Years=10 FV=?

Results n=10 FV = 159,374

Example 3 - Compute PMT - Sinking Fund Payments

It is a stream of equal payments set aside to reach a future target amount like a college fund, a retirement account or planned savings. Rental property needs the parking lot resurfaced in three years, the estimated cost is $50,000. How much is needs to be invested each month at the end of each month for three years earning 10% is needed? Inputs PV= 0 PMT =? I/YR = 10% P/YR=12 Pay at beg of period=OFF FV=50,000 Years=3

Results n=12x3=36 PMT = -1197

Example 4 - Compute PV - Single Future Amount to Present Value

Investments held for their appreciation potential such as art or land. Investor is buying a tract of land you hope will sell for $1,300,000 three years from now. What would the investor pay today with an annual of 10% yield?

Inputs PMT=0 I/YR = 10% P/YR=1 Pay at beg of period=OFF FV=1,300,000 Years=3 PV= ?

Results n=3 PV = -976,709

Example 5 - Compute PV - Discount an Annuity to a Present Value

Investments who buy mortgages. What is the value of a series of $1,000 payments, to be received at the end of each month for three years when discounted at 10% annually?

Inputs PMT =1000 I/YR = 10% P/YR=12 Pay at beg of period=OFF FV=0 Years=3 PV= ?

Results n=12x3=36 PV = 30991

Example 6 - Compute PMT - Series of Equal Payments to Amortize a Present Value

Calculate the periodic payments due on a mortgage or other installment loans. What is the monthly payment on a $250,000 loan for 25 years at 10% interest?

Inputs PV= 250,000 I/YR = 10% P/YR=12 Pay at beg of period=OFF FV=0 N=25 PMT =?

Results n=12x25=300 PMT=-2272

Example 7 - Compute n - How long to accumulate a Future Value

An investor wants to know how long it will take to accumulate a Future Value. If an investor deposits $100 per year in an investment paying 12% interest , how long will it take to reach a value of $3,239.26?

Inputs PV=0 PMT=-100 I/YR=12% P/YR=1 Pay at beg of period=OFF FV=3,239.26 n=?

Results n= 14

Example 8 - Compute I/YR - Determine the annual interest rate

How much yield on an investment problem. If an investment can be purchased for $10,000 and sold ten years later for $31,058.48 , at what annual rate of interest will it earn?

Inputs PV= -10,000 PMT = 0 P/YR=1 Pay at beg of period=OFF FV=31,058.48 Years=10 I/YR = ?

Results I/YR= 12%


Internal Rate of Return (IRR) and Net Present Value (NPV)

I. Internal Rate of Return (IRR)

The internal rate of return for an investment (IRR) is the percentage earned on each dollar invested for each period it is invested. IRR is another term for interest. It is used to measure an investment-s performance.

IRR Examples

Example 1 - Calculate IRR of a Single Amount Received

How much yield on an investment problem.
An investor pays $10,000 for an investment today and it is anticipated to produce net sales of $28,300 at the end of year 10. What is the IRR?

Inputs Cash Flow (Cf0) = -10,000 Sale Proceeds (SP10) = 28,300

Results IRR = 10.96%

Example 2 - Calculate IRR of an Annuity

Annuity valuation.
If a $10,000 investment is forecasted to produce a level of annuity of $1,650 per year for ten years, what is the IRR?

Inputs Cash Flow (Cf0) = -10,000 Cash Flow (CF0 to CF10) = 1,650 Sale Proceeds (SP10) = 0

Results IRR = 10.32%

Example 3 - Calculate IRR of an Annuity plus Single Amount Received

Annuity valuation.
If an investment requiring $20,000 down is forecasted to produce income of $3,000 per year for five years and will be sold at the end of year five for $20,000, what is the IRR?

Inputs Cash Flow (Cf0) = -20,000 Cash Flow (CF0 to CF10) = 2,000 Sale Proceeds (SP10) = 20,000

Results IRR = 15%

Example 4 - Calculate IRR with variable cash flows

Return on variable cash flow investments.
If an investment requires $60,000 down is forecasted to produce variable cash flows each year over a ten year period and will be sold at the end of the year ten for $45,000, what is the IRR?

Inputs Cash Flow (Cf0) = -60,000 Cash Flows CF1=10000, CF2=9000, CF3=8000, CF4=700, CF5=6000 Cash Flows CF6 = 5000, CF7=4000, CF8=3000, CF9=2000, CF10=1000 Sale Proceeds (SP10) = 45,000

Results IRR = 8.61%


II. Net Present Value (NPV)

The Net Present Value of an investment is the sum of the present values (PV’s) of all the future cash flows netted against (added to) the initial investment.

NPV = sum of all PV’s from future cash flows + (initial investment)

The initial investment is a negative number from the investor’s point of view. The future cash flows are discounted to PV’s using a discount rate.

  • NPV > 0 then the investment earns more that the target yield
  • NPV < 0 then the investment earns less than the target yield
  • NPV = 0 then the investment earns equal to the target yield

NPV Examples

Example 1 - Calculate NPV from Cash flows and initial investment - Positive NPV

Valuing investments.
A buyer makes an initial investment of $10,000 that produces cash flow of $0 at EOY 1, $1,000 at EOY 2, $5000 at EOY 3, and $7,931 at EOY 4. If he investor’s target yield is 7% what is the NPV?

Inputs Cash Flow (Cf0) = -10,000 Cash Flows CF1=0 CF2=1000 CF3=5000 CF4=7931 All Sale Proceeds (SP) = 0 NPV Discount Rate = 7%

Results NPV = 1005 Positive NPV this means it earns more than the target of 7%

Example 2 - Calculate NPV from Cash flows and initial investment – Negative NPV

Valuing investments.
An Investor wished to purchase an investment for $10,000 that produces cash flow of $0 at EOY 1, $1,000 at EOY 2, $5000 at EOY 3, and $7,931 at EOY 4. If he investor’s target yield is 13% what is the NPV?

Inputs Cash Flow (Cf0) = -10,000 Cash Flows CF1=0 CF2=1000 CF3=5000 CF4=7931 All Sale Proceeds (SP) = 0 NPV Discount Rate = 13%

Results NPV = -887 Positive NPV this means it does not earn the target of 13%

Example 3 - Using NPV to solve for PV

Determine what to pay for an investment.
An Investor wishes to purchase a property that produces cash flow of $0 at EOY 1, $1,000 at EOY 2, $5000 at EOY 3, and $7,931 at EOY 4. If he investor’s target yield is 10% what price could the investor pay for the property to earn the desired return?

Inputs Cash Flow (Cf0) = 0 Cash Flows CF1=0 CF2=1000 CF3=5000 CF4=7931 All Sale Proceeds (SP) = 0 NPV Discount Rate = 10%

Results NPV = 10,000 = PV or PV of all future cash flows + (initial investment) = NPV


Property

The objective is to determine the value one should pay for a real estate investment such as a rental property, apartments, medical building, or office building where these rental properties are generating a PGI or gross income and have expenses each year resulting in a net cash flow to you the investor and at the end of the holding period you will sell the property. So at the last year there is cash flow (NOI) and a sale price that must be netted.

The NPV will be the value of the property, which is determined from the net cash flows (NOI’s) the rental property will generate and the sale price at the end the term when you sell the property. Using the discount rate or the expected return for the investor (you) the cash flows and the sale price are discounted back the present time (year 0) and the result is the value of the property.

A subsequent statistic that is computed is the cap (which is computed as the average of the NOI’s).

Cap Rate = Average NOI / Value where Value is the NPV or that value you have computed.

NOI is the net cash flow.

(NOI = PGI - Expenses) where NOI is the net operating income and PGI is the Potential Gross Income

  • Enter the discount rate
  • Enter the PGI (Potential Gross Income) and the Expenses
  • Enters the price that the property will be sold for
  • Press the compute button

The program subtracts expenses from PGI and stores it into the NOI (Net operating income)

The program reads the sale price and assumes it is an input cash flow on the last year that the user has inputted a PGI

The program takes all of the NOI’s and the Price it is Sold at the last year data has been entered and determines the net present value which is the value of the property - it is the value that the investor should pay for the investment

The program also determines the average yearly NOI and with the value it determines from the evaluation, it computes an average cap rate

With the cap rate and the value of the property the investor can compare this investment to others


401k/IRA

A 401(k) plan is a type of defined contribution plan (under the IRS’s definition). It is a salary reduction plan, where employees must choose a percentage of their salary to contribute to the plan, and the plan spells out the extent of employer matching, if any (regardless of profits). Employee taxable salaries are reduced by these contributions, the contributions are invested, and any earnings are tax-deferred, i.e., until the employee draws the money out at retirement.

401k/IRA Examples

You currently have $10,000 in your 401(k). Your annual salary is $50,000 and your monthly contribution is 6% of your monthly salary. The plan has been earning an average of 8% (compounded annually) per year, and you expect that to continue for 10 years.

Answer:

Inputs:

401k/IRA Balance = $10000

Monthly Contribution = $250

Expected Yearly Return Percent = 8%

Number of Years in Future = 10

Results:

Total Profit: $27,932.91

Future Value of Investment: $67,932.91


Credit Card

Determine the time it takes to payoff a credit card given initial dept, monthly payment, and annual interest rate. This will also calculate how much interest you paid over time.
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