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Alan Cring Productions in association with the Emergent Light Studio presents

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the Illinois State Collegiate Compendium, academic lectures in business and economics.

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This is Business Finance, FIL 240 for spring semester 2024.

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Today, present value and future value. And at the appropriate time, I'll stop

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the lecture, you have a quiz today. But before we begin that, all of that, a quick

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look at the numbers. And I won't ask you whether this is a bull or a bear day

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because it's kind of not one or the other. If you look there, the markets had

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a strong opening for about the first hour and then it just kind of fizzled out

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and the bears took over. The Dow was just bouncing around barely a positive by now.

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It's just not one of those days where it could sustain the optimism that started

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it up. A couple reasons for that, but going through and having a quick look at

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the Dow is up about 0.12, that's nothing. S&P 500 is up a half a

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percent and the Nasdaq is up three-quarters of a percent. So yeah, it is

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sort of a bull day, but it just doesn't want to be a bull bull day. It's sort of a,

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I don't know what you'd call it, it's not an enthusiastic run-up with no end in

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sight to the upside of it. So, but the other side of it though is, some good

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news there is that the 10-year bond, the yields are falling, that means prices are

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rising, which means that there's demand for bond securities, but there's not any

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sell-off of, real sell-off of stocks, so it's not a flight to quality kind of

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thing. It's just that there is some enthusiasm in the bond market and the

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yield continues its track downward. As I had said in the lecture on Monday, it's

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trying to find its way down below 4% and every time it goes down, well that's

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better news for the economy as that will lead interest rates in general down. Gold,

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oddly enough, gold was trying to spike earlier, but then it's lost its

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enthusiasm too, so it's not like investors are charging, running to gold

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or anything like that. It's just not a very bright, strong bull market today, but

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it isn't a bad market either. This is one of those kind of days of, meh, it's okay.

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And as you can see, crude oil, it had been working its way up perilously toward

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that upper end of that trading range of 72 to 79, and now it's putting some

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distance on it, going back down. There were some jitters in the market, in the

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oil market earlier in the week, it looks like they've finally calmed down, there's

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not going to be any supply disruptions or anything like that. Good news there.

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On the other side of the world, the Nikkei just couldn't find any reason to be

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happy most of the day. It started out right at the bell in negative territory

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and then it just kind of floated from there, a little bit down. You had a rally

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there at the end, bulls were trying to bring it up above the waterline

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there, but they didn't quite get there and there was a sell-off right at the end

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of that. So Tokyo was not a happy place today, it wasn't anything terrible, but

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just wasn't happy. Now interestingly, as of right now, and London is still trading,

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but they had a little bit of a surge, well it was not that bad, but then after

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some good news came through, it just sort of left it to drift and a little bit of

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sourness there, but it'll probably end the day up, but not much more

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than where it is now. It's just they had some good news and that was the end of

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it. Let me show you a stock here. This one is, and I'm showing you this one because

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its earnings are coming up I think in two weeks and so you've got activity

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sort of like the side of the bets are going on as to how those earnings will

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look. Now this is Nvidia. N-V-D-A. And one thing about Nvidia here is their

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earnings are coming up in a couple of weeks. They are forecasting that their

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earnings will be very strong and so first thing the markets do is they say

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okay we're going to price based upon what they're saying and then as the

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earnings date when they make their announcement of what they actually were

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for the quarter then the rumors start. Well they'll be below what they estimate

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or they'll be above what they estimate. So that'll drive the markets up to the

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point where the earnings call happens. And here you can see Nvidia is a

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stupidly expensive stock. $730 per share. Which puts it, I mean yeah if you want to

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buy a round lot, a hundred of them, you can but I mean that's going to cost you a

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lot. Even one share is awfully rich for most people in this class,

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including me. But you notice that it is up about 1.15%

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for the day. In other words the rumors are that the earnings will come in

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better than what Nvidia is saying they will. Now if you look down here real

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quick you can see a quick chart of earnings. You notice that Nvidia has been

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beating its earnings forecasts for the last year. Every for each quarter of last

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year. When it says well our earnings will be here for example the last one.

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They'll be a little better than $2 a share. Well they came in quite a bit

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better than $2 a share. So now the same happened here with this quarter. They

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the company said we are we think our earnings will be about $3.40 a share.

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Well when they came in they were $4 a share. So that gives the market this

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feeling that the company is conservative in forecasting its earnings. So here we

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come on February, oh that's the 21st, it's not quite, well that's a week from now.

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I'm sorry that's a week from now. So Nvidia is saying our earnings are going

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to be at about $4.50 a share. And if you're looking at this the market is

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pushing it up a little it was pushing up saying okay we think that it will

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probably be a little better than $4.50 a share. We're going to buy in. Now here's

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the rule and I said this on Monday and I'll say it again. There's an old rule in

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investing what this kind of investing. Buy on the rumor, sell on the news. In

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other words right now the rumors are that Nvidia is going to come in with a

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very strong stronger than their estimate earnings for the previous quarter. And so

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it's going up. So you see buying on the rumor. Now when the company comes out

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with well our earnings were well suppose they are better than normal. That's not

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going to move the stock at all. So you sell on the news. If they come in worse

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you get out of there before they make the earnings call. Any way you cut it it's

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smarter to get out when the news is about to happen on what really

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what the earnings really were. So right now you see the market buying. Let's

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look back here about five days. It's kind of pushing itself upward

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here. It had a big spike when there were rumors that they were going to come in

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substantially above 450 and maybe about 474 80. So that was where the main part

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of the rumor was turned into action by investors. They bought there on

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the spike of the rumor. Now there is more belief. Sorry about that. Try that again

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five day. Now there's rumors that maybe it'll be a little better than we

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expected and so it's still climbing. It's doing pretty good for the time being.

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Now what's going to happen? It's hard to say but right now there's positive

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sentiment about Nvidia. If you look at the numbers though the beta is 1.68.

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That is a very risky investment. So even if you were to say buy on the rumor

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you're buying on very risky rumors. This company is fickle. It can burn you.

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Either way it can take you down. The PE ratio is telling us that it is

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substantially overvalued. So any price run-up in this is going to be temporary.

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Eventually it will find its way back down toward intrinsic value at a PE ratio

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of about 30. So that's how you think about this. Now you see Nvidia is a

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profitable company. EPS earnings per share which we covered last week in

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ratios is 7.58 or actually on one Monday we did this. So $7.58 a share.

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That's a really healthy company but notice this the dividend is really small.

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In other words this company takes most of what profit it makes and plows it

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back into the company's operations. In other words a rough way to think about

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the company made that belongs to the shareholders $7.58 per share.

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Now they are giving back to those shareholders only 16 cents of that. So

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the remaining $7.42 they're turning right back into the company.

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That's risky. I mean if you're an investor getting a dividend check is

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very low risk but thinking the company can throw your money back

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into the company instead of getting it to you as a dividend and that money is

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going to turn into a great deal more money. Well that's when you take risk. This

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company has a very low dividend that it pays 0.02% of the price you're

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paying for the stock so it's almost virtually no dividend. You're betting on

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this stock continuing to rise for the foreseeable future but when you see that

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the PE ratio is already well above what would be intrinsic value of the price

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well that's risky as all get out. That's a very risky stock. Something that you

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might be tempted to jump into but you might be sorry when you did it.

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Okay I don't know it's hard to say what else to look out. Well one quick thing if

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I'm not mistaken alphabet which is what we call Google up barely today very very

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little activity. In other words it's acting like the mark overall market is

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acting. Very sluggish bullish yeah but not some spectacular bull run. On the

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other hand you look at a company like Tesla TSLA which has a very high beta

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and it is up the stock market is up a little and with a high beta that would

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tend on an average to mean that the stock is going to go up by a magnifier

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of it and sure enough it is it's going up today but it's still not a

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spectacular thing it's still kind of like a grind upward but it is a it is an

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upward trend. So that's how you look at all these. Now let me get down to the

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lecture and I've said a little about this on Monday and a couple of other

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lectures too but long ago back a well before your time and we did these

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present value future value with formulas on paper and maybe we had real real

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sluggish old old calculators or we use slide rules which were a mechanical

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device for doing multiplications and divisions but then came along in 1975 I

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think it was Texas Instruments came out with one of the first consumer level

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slide rule calculator it was a scientific calculator and it was

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something it was just appalling the things that it could do that we used to

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do by hand or using tables. Few years later back in the early 80s I think it

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was financial calculators started showing up the cream of the crop at the

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time was one by Hewlett Packard the HP 12 C I'm telling you all this to explain

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why we're going to do it the way we're doing it the way we are now but back

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then the HP 12 C was like in all the big wigs all the traders all the corporate

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finance people got their hands on HP 12 C's the only downside of them was they

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didn't use algebra algebraic notation they didn't say you didn't put in five

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times two equals they use another system called reverse polish notation RPN so

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you would put in five enter four times and that's either here or there Texas

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Instruments came out a while in the same era in competition with some low-end

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business calculators like the BA series and they actually did things like

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present values future values and it was kind of a revolution but it was kind of

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cumbersome they had a one-line display and it was you had a little skill it's

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still around and some people still use it in fact I if the book is still doing

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it like they did in the last edition which is the one that I've been using

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until I got my new edition they actually show you how to do these problems on a

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BA 2 a Texas Instruments BA 2 but then came along something a little later the

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Texas Instruments TI 80 series 80 they 0 the 8 to the 8 3 and 8 3 plus the 84

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these had an actual set of dedicated functions they called them apps and you

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hit apps and then they gave you what different ones and you went to the

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finance and lo and behold the about anything you could want to do bond

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mortgage payments present values future values effective interest rates and that

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was the standard but of course in colleges they weren't going to have

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anything to do with that they still wanted students to use either calculator

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basic calculators with but usually with tables you use tables in a class in your

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in your accounting classes those are the same tables that have been around for oh

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actually more than a century it's an old technology really old just you go to the

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table and find a factor and you multiply that by the amount of money and there

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you've got an answer but it's still cumbersome it's ancient but it's still

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used and then along came well then a few professors started saying no we're going

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to do these with those financial calculators this is ridiculous and even

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as much as recently as two years ago I was taking flack because I was saying

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we're using calculators we're not going to do this with tables and with formulas

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we're going to use calculators so of course that was an outrage and they they

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tried to hang me for that but then came excel but its predecessors had been

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around and some were using its predecessor the first one was CP slash M

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and then came along super calc then Lotus one two three then quattro and

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then excel but god forbid I should use excel to teach you how to do these

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finance problems and of course you can tell how much I care about that you're

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going to use excel to do most of your work in here now don't get me wrong

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there are times when a financial calculator can actually do it a little

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bit faster than excel because it's excel is laid out for many many different

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things and these the financial apps they they are right there just to do one

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thing and one thing only finance I'm going to show you something here now one

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more piece of the story is this the Texas it's with TI-83 there Texas

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instruments actually created and kind of made available to geeks like me and

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others a virtual TI-83 calculator it was it comes up on your computer it looks

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like a real one it functions like a real one it's just like you have in fact it

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even turns off after a minute if you don't use it for some reason to save

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battery or whatever but it was out there and it was available through the 90s I

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was I was using it but then TI did Texas instruments it kind of disappeared from

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their website some years later what behold it showed up at Google in a Google

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site run by Google and then about five years ago it what they locked it down so

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you couldn't get to it well you see I actually still had my old floppy disks

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that had the original virtual TI I'm going to show you something I've made it

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available so that you can download it now if you go posting this on social

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media I will hunt you down but here it is the warning is it works only on PCs

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because PCs Macs are not used in finance they're just not there as a matter of

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fact scientific subject matter research calculations Macs just aren't built for

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that so it's only available if you have a PC let me show it to you you go into

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your files okay this is what you'll see okay files right here now follow the

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follow the instructions so you can see how this is done files and if you go

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clear down to the bottom of the top level of the files you'll get the very

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last file you see is virtual TI-83 graphing calculator you see it and this

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is in you'll be able to do this but you have to follow what I'm going to do here

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step-by-step first thing you download it now the next thing is you're going to go

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and find this file it'll be in your downloads

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download there it is virtual TI-83 calculator now this is a zip file so

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you're going to have to right-click and well this didn't work in my first class

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try to yeah they've made it so that the just double clicking won't extract it

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but you can just go like this right click show more options seven zip so

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extract the files that way with a right click and go to more options you'll see

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extract the files and there it will come up

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so what you're going to do is you're going to you can leave this in downloads

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if you want you're going to extract it just extract it to the downloads okay

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and you say okay now it will extract a folder of the same name now you can put

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this leave it where it is you might want to put it someplace else because if you

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if you're like me you usually clear out your downloads you delete your downloads

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after a few days so I usually just take this over and I put it in my documents

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well that worked as like a frickin charm oh there it is

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well let's try that again documents there we go I screwed up there

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documents there it is now in here you double click and you'll have to double

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click you'll double click and get to a folder VTI 83 go down one more level

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there's the calculator the one that is the blue icon don't just leave it there

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right-click and then go down to more options and send it to your desktop

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that way the calculator will always be right on your desktop where you need it

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the most now you can't see the desk really let me do this this is what it

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will look like on your desktop and that way you can bring it up whenever you

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want I you could leave it in double go into documents every time you wanted to

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bring it up but it's nicer to have it on your desktop watch it's doing those

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look at that there's your calculator okay it's a real one it does everything

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that the real one does it never runs out of battery and it's always there for you

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you don't have to search around in your bookbag for it it's right there on your

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laptop or whatever now I'll just show you this very quickly once in a while I

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might we'll do this in Excel and then I'll say well let's see if it in the TI

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like I said sometimes this calculator it's more efficient to do it here the

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downside though is that if you do finance calculations on the calculator

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you don't have any documentation of it with an Excel spreadsheet you've got it

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you can print it you can email it to people here it's just for you to be able

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to do something if you do apps and finance number one enter you've got all

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of these anything almost anything that you could possibly want for a class like

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this is there somewhere and they just like for example and I'm sneaking

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something in on you time value of money solver now you don't have to know this

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don't type this for God's sake but let's say we want the how much you would have

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your monthly payments would be on a car okay we're going to get a five-year loan

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with 12 payments per month 12 payments a year so that would be 60 payments every

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year well let's say that the APR on the loan is seven point nine nine percent

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that's annual so you have to divide it by 12 to get months and I'll teach you

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how to do all this now the price value the present value on almost any financial

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calculator you'll ever use present values come out as negatives and you

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enter them as negatives so let's say that you decide you want to buy a

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twenty eight thousand dollar car so I would put in for the PV negative 28

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thousand try that again 28,000 and I'm going to skip by that I'm going to leave

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everything else alone the payments are at the end of every month you don't play

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with fees no matter what you were told by other clay in other classes future

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value you're not going to pay any kicker at the end so I just take it back up

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here to PMT and then I say alpha solve and there's your monthly payments that

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fast this is actually more efficient if you remember how to put in each of the

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entries this is faster than Excel because you're going to have to do the

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setup of each of the parameters and then plug them in remember what function it

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is and all that this and there are so many other kinds of problems that you

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could do let me do another one okay let's say that for the next 15 years I'm

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going to put money into an account that pays five point two five percent

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compounded quarterly divide by four and then I'm going to say whoops so that

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means that this would be 15 times four quarters you always have to make account

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of the compounding period and the payments that let's say that I decided

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that I am going to want to make payments into that of every quarter I'm going to

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put in $500 and I have no present value I'm not going to put it in any extra at

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the beginning

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so that's a zero now in this case I'm going to put in the payments at the

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beginning of every quarter so how much will I have after 15 years of doing this

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that was I said 15 years yeah let me do 15 times 4 and it's a lot easier to fix

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it here so let's see how much I'll make my last payment and one quarter after

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that I'll take the money out let's see how much I'm taking out alpha so

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forty five thousand eight hundred dollars this is incredibly faster and

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more efficient than Excel but Excel is how we do things and Excel you will have

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a paper trail electronic or printed if you wish so even though this does

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lightning fast once you get the hang of it it's just sort of like a mini

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language it works awfully fast that's all there is to it so I won't hate on

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you if you want to use a calculator either a physical calculator or this

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virtual TI-83 I won't hate on you but you do have to we do have to know the

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the Excel version to help you with that I have already created a bunch of

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templates now we're going to build these templates together so you see how they

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work and see where you have to put things in but in Excel let me do this

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student view so in your files you go down here to your spreadsheets and you

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will have a whole bunch of different templates for different major problem

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groups like bond calculations like free cash flow analysis like internal rates

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of return and loan payments and net present values and internal rates of

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return present value and future value we'll have templates to do these your

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job is to master the Excel and then to make those templates your own so that

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they can do this which we did a century ago on paper then we did with tables

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then we did with calculators and then somewhere along the line we finally came

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to Excel and that's where we are now we can't be too comfortable here because

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Excel is evolving rapidly it'll still be around for several decades but it's

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beginning to be augmented first by Python it's augmenting it and then

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within a year easily artificial intelligence will also jump in too I've

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already connected some one chat GPT to Excel so the GPT goes over and creates

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models in Excel for me to use and so but I'm trying to keep you as close to the

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frontier as I can and right now the frontier is Excel so these are here for

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you and we will go through each of them I you might even want to download and

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look at them and see if you can figure out how what happens I've tried to

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color code them so that you know where something needs to be put in and what

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you leave alone and where your results come out matter of fact let me how does

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this one look up I don't I always do that let me do look at the present the

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ones today seriously

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now these are for annuities but you can use those these for lump sums as well

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and you can see how I set them up there's cut they are color coded don't

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touch anything here put in the white spaces you put things that you get from

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problems and all that this is just taking you on a quick tour of what I've

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created for you to do these with this in one way yes it does make you weaker

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because you don't know the formulas and you can't do things the way we did back

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in the neolithic period but in a way it makes you a lot stronger and so we have

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to leave some things behind as we accelerate into the future and that's

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where we are at least in my classes as long as you're in my class I'm right okay

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enough of that let me go back let me get out of this for a while now I want to

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point out one thing here sometimes a problem is in what we're doing right now

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a problem is so easy the formula is so lightweight that it's better not to use

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Excel at all and even the calculator you use just use as your dumb monkey in

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doing them but I start this and I do appreciate that you were shown this in

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your accounting classes and that's why I have to do it again so that you learn

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how to do it from a finance person let me do it you came to me sir and you

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decided I you told me I want to borrow $20 from you for a year and I did the

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old intermediation of the level the timing and the risk okay yeah I'm gonna

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give you a $20 that that that day and of and you say that is sweet brah I mean

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I'll give you the $20 back one year from today and I say you kiss my wrinkled old

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ass you will what's wrong with him giving back that money right now madam

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give me it back to me in a year my $20 is going to give back to me in a year

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will you get away from that wallet dude what's wrong with that well I said it's

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a year's okay I mean it's a year's okay but he's going to give me my $20 back

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yeah well that there's that's exactly right but we can even ignore

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inflation eroding purchasing power we can erode risk factors and all that

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there's something basic you see I am I don't have this $20 for a year that

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means in for a year I cannot use that $20 to buy a grand slam breakfast at

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Denny's on their happy meal menu and a piece of pie afterwards I have foregone

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consumption I have given it up for a year so I want he has to offer me some

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compensation for the opportunity cost of foregone consumption that's not

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inflation eroding purchasing power that's nothing but the fact that I don't

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get my grand slam happy meal and my piece of apple pie and my coffee for a

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year that's the problem you see that's how Western capitalism works you give up

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something you get something for giving it up and that is what we call an

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interest rate that's what we call it it's an interest rate that's what its

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function though there you'll see later in the course interest rates have a lot of

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different parts to them but at the core of every interest rate is a reward for

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for giving up consumption the opportunity cost of foregone consumption

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that's what an interest rate is and another thing about an interest rate well

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two other things one is that the interest rate has different names they're really

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all interest rates we can call it a yield a compounding rate a discount rate

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we can call it some other things but it's they're all interest rates now the

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interest rate that I will charge you is not a price it's a rental rate a rental

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rate for money it's the rental rate so it's like a wage rate it's like anything

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else when you get a when you get a job yeah I've been telling you get a job for

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a long time get a job man no but when you are working a job I hired you I

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didn't buy you that's seven dollars and twenty five in your case four dollars an

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hour that is that is not a price I am just renting you for for whatever I I

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need okay that's the whole point of understanding that these are just rental

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rates it's like real estate rental rate of property or something like that a

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wage rate rental rate of labor and human capital the interest rates are just a

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rental rate of money or capital in one one or the other so taking all of that

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into account we begin the journey and I do this in a way of warning you that for

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many years I was a math teacher both at the Ohio State University and in a K

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through 12 school where the kids like me but the administrators were really

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scared of me but or didn't like me so let me start it out and hear me out

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about this somewhere in your dark past

358
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you learn conversions unit conversions one centimeter equals 2.54 a one inch

359
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equals 2.54 centimeters one foot equals three yards now what we do with present

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values and future values is we are doing unit conversion that's all we're doing

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the difference is that these are what are called static conversions they're

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the same in any situation if you're if the units are the same the conversion

363
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rate is the same and it's true at any given time period any given place

364
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anywhere in the universe you're going to fly to Alpha Centauri and your co-pilot

365
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is going to say well how far have we gone well we've gone 1 billion

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centimeters and he says no dude I wanted in inches come on man we're English we

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use the English system so it would be the same there in 200 years but with

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money it's not a static conversion it has things that would be different

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depending upon actually two parameters and I'll get into that in just a minute

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again as a matter of fact those tables that you had in your accounting courses

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to find present values and future values those were unit conversions no one

372
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probably ever told you that but that's all they were they're just unit

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conversions based upon the interest rate and the time period the interest rates

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across the time I think that was with it interest rates across the top the time

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period down the column or maybe was the other way around but those were nothing

376
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but unit conversions but as you could see from those monster tables those

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ridiculous tables they were not static you couldn't just look at the same

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place every time so what I'm going to do is I'm going to write a formula the

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for this is actually the core formula of all of the time value of my of all time

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value of money problems the future value of a lump sum of money future value of a

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lump sum now this formula is so basic that you you might want not want to use

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a Excel at all for something like this just set it up and key the numbers into

383
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the calculator but the future value is the current value what we call the

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present value times 1 plus the disk the interest rate and that quantity to the

385
00:42:01,640 --> 00:42:13,620
t-power this is where you have to watch yourself because the R is the periodic

386
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rate and the t is the number of periods

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so the periodic rate so let's say that we had 8% APR annual and the t let's say

388
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the t let's say that the t is why I don't know five years see these are both

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in years annual percentage rate number of years so let's take an APR of 8% so

390
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the periodic rate and over here the number of periods over here are so

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let's say that we had number of periods that would be for let's say the number

392
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of periods was 1 so in that case you would have 8% divided by 1 which would

393
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be 8% and that's what you would put in there 8% 8 divided by 1 the number of

394
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periods would be 5 times 1 so the number of periods would be 5 so you would put a

395
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5 there let's say that the number of periods was 2 semi-annual compounding in

396
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this case R would be 8% divided by 2 which is 4% and the number of periods

397
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would be 5 times 2 or 10 periods so in the art you would put 4% and in the t

398
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you would put 10 let's try quarterly 8% divided by 4 quarterly is 4 in that case

399
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your so your so your R would be 4 and your number of periods would be 5 times

400
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4 there would be 20 quarters in a year those would be the numbers you put in

401
00:45:18,120 --> 00:45:25,680
now a very popular one is monthly that's how you most consumer loans have

402
00:45:25,680 --> 00:45:30,640
monthly payments so the compound is automatically monthly in that case you'd

403
00:45:30,640 --> 00:45:41,160
have 8% divided by 12 which would be 0.67 percent and the number of periods

404
00:45:41,160 --> 00:45:52,640
would be 5 times 12 or 60 months in five years. Now the next one suppose that the

405
00:45:52,640 --> 00:45:58,360
compounding is weekly what would be what would you multiply the interest rate or

406
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divide the interest rate by weekly 52 you'd be surprised at how many people

407
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don't know that in my last class I got 54

408
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8% divided by 52 for weekly and your number of periods would be 5 times 52

409
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which is I'm not even going to try how you did that in your head hell okay the

410
00:46:40,360 --> 00:46:48,040
next one minute lay no no no no don't don't don't yeah there is yeah minute

411
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lay and there's actually even if you have massive amounts of money a bank may

412
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give you instantaneous compounding and it doesn't even follow that simple

413
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division you have to use the natural constant e to the R or to the negative R

414
00:47:07,560 --> 00:47:17,280
it's weird but anyway okay enough of that but now a little side note here the

415
00:47:17,280 --> 00:47:26,240
prefix by bi that means that it's every other so if I said bi weekly that'd be

416
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26 bi monthly every two months that'd be six and then there's the semi you see it

417
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there semi annual means twice a year semi weekly would would it gets a little

418
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bit more complicated so I wouldn't do that semi annual is normal but the by

419
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you here well you're paid bi weekly and in that case that means that you get a

420
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paycheck every two weeks and that's actually very common in some companies

421
00:48:03,520 --> 00:48:08,200
and industries to pay bi weekly so I won't throw that one at you but just

422
00:48:08,200 --> 00:48:19,280
know the 1 2 4 12 52 and those will get you through well let's play into practice

423
00:48:25,160 --> 00:48:34,600
I died and you were my son and I'm bequeathing to you $250,000 I'm not dead

424
00:48:34,600 --> 00:48:40,240
yet I've just told you about this $250,000 so of course the first thing you

425
00:48:40,240 --> 00:48:49,240
do is go look up how to kill your dad but as it turns out now I actuarially I

426
00:48:49,240 --> 00:48:55,600
will live to 83 years of age now don't believe that stuff about 77 or whatever

427
00:48:55,600 --> 00:49:02,760
it is right now life probabilities don't work really like that if you live to a

428
00:49:02,760 --> 00:49:07,440
certain age you will live a certain number of years past that so if I live

429
00:49:07,440 --> 00:49:12,840
for example if I live if I'm 65 there's a very high probability that I will live

430
00:49:12,840 --> 00:49:20,000
to be 83 years old so let's take that as a basis here

431
00:49:21,520 --> 00:49:24,520
you

432
00:49:24,520 --> 00:49:26,560
you

433
00:49:31,320 --> 00:49:36,560
will inherit

434
00:49:36,560 --> 00:49:55,760
$250,000 in 18 years

435
00:49:55,760 --> 00:50:13,480
how much is that worth now if the discount rate

436
00:50:13,480 --> 00:50:39,400
is 7.4 percent compounded quarterly now over here I'm going to do another

437
00:50:39,400 --> 00:50:53,240
problem where you put $15,000 in the bank now

438
00:50:53,240 --> 00:51:09,760
you put $15,000 in the bank in a bank account

439
00:51:09,760 --> 00:51:28,320
that pays 5.75 percent compounded monthly

440
00:51:28,320 --> 00:51:56,240
how much will you have in 15 years these are two opposite sides of the same coin

441
00:51:58,360 --> 00:52:10,360
let me explain you see in that second problem in that second problem I am

442
00:52:10,360 --> 00:52:18,800
trying to find a value in the future so that formula is what I need but the that

443
00:52:18,800 --> 00:52:25,880
first problem over there that's I need to know a present value how much

444
00:52:25,880 --> 00:52:35,720
something is worth now so I have to take this formula and for that one I have to

445
00:52:35,720 --> 00:52:42,080
rearrange this formula so that I get the present value and that will be the

446
00:52:42,080 --> 00:52:50,920
future value divided by 1 plus R to the T so this is the future value formula

447
00:52:50,920 --> 00:52:58,920
this is the present value formula and those two are the foundation of all of

448
00:52:58,920 --> 00:53:03,840
the other formulas they might look a lot more complicated but they really all are

449
00:53:03,840 --> 00:53:09,600
derived from that one little thing about this present value formula you'll

450
00:53:09,600 --> 00:53:16,320
oftentimes see me write that as instead of future value divided by 1 plus R to

451
00:53:16,320 --> 00:53:27,320
the T you'll see me write it as future value times 1 plus R to the negative T

452
00:53:27,320 --> 00:53:33,640
from your high school algebra the reciprocal of the denominator to a power

453
00:53:33,640 --> 00:53:39,960
is the multiplication of that denominator by the negative of the power

454
00:53:39,960 --> 00:53:48,000
now why do I do this it's practical dividing by a complicated set of numbers

455
00:53:48,000 --> 00:53:57,200
calculation you are more likely to make a mistake in it that you could do it

456
00:53:57,200 --> 00:54:02,400
with the second line there but you'll see me usually do it by the third line

457
00:54:02,400 --> 00:54:06,560
just run it as multiplications instead of trying to remember how many

458
00:54:06,560 --> 00:54:13,040
parentheses you put in in a denominator and I am all forever getting that wrong

459
00:54:13,040 --> 00:54:20,840
so in other words for the second problem I did where you put $15,000 in the bank I

460
00:54:20,840 --> 00:54:30,000
will need to find out the future value and that would be the first formula

461
00:54:30,000 --> 00:54:47,320
there it's the present value 15,000 times 1 plus the R 0.0575 divided by

462
00:54:47,320 --> 00:55:02,680
monthly 12 and then you raise that to how many years did we have the 15 times 12

463
00:55:03,080 --> 00:55:09,720
here's where you got to watch it that that exponent you've got to put it in

464
00:55:09,720 --> 00:55:17,080
parentheses otherwise the calculator will take the power as 15 and then

465
00:55:17,080 --> 00:55:23,280
multiply the result by 12 let me show you and I'll just do it on this TI since

466
00:55:23,280 --> 00:55:28,480
I've got it up here where you can see it do you see this this calculator turns

467
00:55:28,480 --> 00:55:39,760
off after a minute why why would the calculator turn off to save battery okay

468
00:55:39,760 --> 00:55:45,440
let me get out of this by the way the way you get out of the apps second quit

469
00:55:45,440 --> 00:55:48,440
okay

470
00:55:49,840 --> 00:56:04,000
cranking it along here I'm going to take 15,000 times open parentheses 1 plus

471
00:56:04,000 --> 00:56:19,040
0.0575 close the parentheses and then raise it to the open parentheses 15 times

472
00:56:19,040 --> 00:56:26,240
12 oh I screwed up did you see what I did there I didn't even look at my own

473
00:56:26,240 --> 00:56:35,360
formula divided by 0.0575 divided by 12 close the parentheses and then raise

474
00:56:35,360 --> 00:56:45,200
that to the 15 open parentheses 15 times 12 so let me repeat that for the podcast

475
00:56:45,200 --> 00:56:56,040
15,000 times open parentheses 1 plus 0.0575 divided by 12 close the

476
00:56:56,040 --> 00:57:06,080
parentheses to the power open parentheses 15 times 12 close parentheses

477
00:57:06,080 --> 00:57:17,320
a caution here if you are doing just formula math on a calculator or you're

478
00:57:17,320 --> 00:57:26,520
using Excel you use the decimal per version if you are in the apps on a

479
00:57:26,520 --> 00:57:32,560
financial calculator including this one you don't turn it into a decimal you key

480
00:57:32,560 --> 00:57:39,120
it in as the percent so if I were in the apps here I would have put point 0.0575 I

481
00:57:39,120 --> 00:57:46,720
would have just typed in 5.75 all financial calculators do that they take

482
00:57:46,720 --> 00:57:52,400
it as a percent Excel doesn't the normal front end of any calculator

483
00:57:52,400 --> 00:57:57,280
scientific calculator or other calculator doesn't do it but anyway

484
00:57:57,280 --> 00:58:05,880
survey says hit enter $35,463

485
00:58:05,880 --> 00:58:24,120
I'm a little worried about that here real quick

486
00:58:26,640 --> 00:58:34,240
don't worry about what if the book says rounded two decimal places yeah but when

487
00:58:34,240 --> 00:58:40,560
we do these in my in my book the dollar just rounded to the dollar and if you're

488
00:58:40,560 --> 00:58:48,160
on a quiz or an exam I give you a couple of dollars leeway either way and it just

489
00:58:48,160 --> 00:58:52,680
in case you had a little bit of a finger fart or something when you were keying

490
00:58:52,680 --> 00:58:59,080
something in the next question is does this make sense the answer if you've

491
00:58:59,080 --> 00:59:03,880
done something major wrong a wrong place a division is that a multiplication

492
00:59:03,880 --> 00:59:12,240
or something like that finance problems will either blow up the answer or turn

493
00:59:12,240 --> 00:59:18,720
it into little pennies if you get a number that kind of makes sense well you

494
00:59:18,720 --> 00:59:24,600
probably got it right so that's a comforting thing now let me do the other

495
00:59:24,600 --> 00:59:31,600
one here for that one we're going to use the future value the present values

496
00:59:31,600 --> 00:59:45,400
$250,000 times 1 plus in this case it will be point zero seven four divided by

497
00:59:45,400 --> 00:59:54,920
four quarterly to the negative how many years whether 18 years times four

498
00:59:54,920 --> 01:00:16,680
quarters per year so in that one 250,000 times open parentheses one plus point

499
01:00:16,680 --> 01:00:26,800
zero seven four divided by twelve close the parenthesis and then you raise that

500
01:00:26,800 --> 01:00:37,120
now open parenthesis why do I do this why don't they put me in a home you know

501
01:00:37,120 --> 01:00:42,480
give me a tray of food every day and you know maybe let me play on the shuffle

502
01:00:42,480 --> 01:00:55,520
board and take my metamucil open parenthesis now here one thing I want

503
01:00:55,520 --> 01:01:05,160
mention here oh let me try that again really 24,000 250,000 times open

504
01:01:05,160 --> 01:01:22,080
parenthesis whoa boy if I had a dog I'd like this I'd shoot him plus point zero

505
01:01:22,080 --> 01:01:35,920
seven four divided by four close the parenthesis and then raise that one point here put a

506
01:01:35,920 --> 01:01:41,880
negative right here you don't use the minus use the negative and you put that

507
01:01:41,880 --> 01:01:51,640
18 times four close the parenthesis and you get an answer sixty six thousand

508
01:01:51,640 --> 01:01:56,880
seven hundred ninety five dollars and everything else will put we'll do an

509
01:01:56,880 --> 01:02:02,320
Excel on Monday right now you have a quiz to take once you're finished with a

510
01:02:02,320 --> 01:02:14,120
quiz that's all I have for you today I thank you