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The Illinois State Collegiate Compendium Academic Lectures in Business and Economics.

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This is Business Finance, FIL 190, for spring semester 2024.

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Today, the Time Value of Money, round two.

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And this is with Excel.

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And I'm just going to show you the Excel routines that you would need.

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And I have the model already built for you in Excel.

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You can download it.

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I'll show you where to download it here presently.

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Give me just a minute to finish getting the podcasting set up for this.

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But you're already seeing in this Excel why you are in a different world from what we

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were even five, ten years ago.

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And even at this point, most of your classes will use Excel as essentially a talking monkey.

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They will not be using the full power of Excel.

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And there are so many functions that you'd have to be Rain Man to remember every function

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in Excel.

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It's that bad.

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I am neurodivergent and I can't remember half of the functions from one day to the next.

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But let me go in here and I'm going to pull up Canvas and I'm going to go to the student

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view here.

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And I showed you this before, but let me come online here for a student view and I'm going

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to power up the projector.

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I'm not saying you are allowed to use Excel.

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I'm saying I expect you to use Excel on your quizzes, your homework, and your exams.

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It's no longer an option.

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It is now to the point where this is the way you're going to stay at least somewhere near

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the frontier of the technological revolution that is moving so quickly.

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Fortunately, Excel will be the go-to for corporations for the next 10 to 15 years.

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And even as companies begin to embrace generative AI, they will still reference back to Excel

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for several reasons.

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One is simply because so much of the body of our financial literature, our financial work,

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is in Excel that we can't dispense with it.

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It will become sort of like the slave of AI as time goes on.

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We will do things with artificial intelligence, generative artificial intelligence.

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And then we will have results or actually even the calculations themselves posted to

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Excel.

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In the same way, we will write Python.

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Python is about to be included in Excel if it's not, I don't know if it's actually the

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release is coming out yet.

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But you will use Excel to hold up the weaknesses of Python.

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Python, the strongest of the new languages for statistical and analytical calculations

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is R. R is an abomination hated by God.

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It is hard.

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But you can use Python and have Python use Excel to do a lot of things and that boosts

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it so that it is stronger and it can be used as a, you don't have to use R. So keep in

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mind Excel is big stuff.

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Now here in your Canvas platform, files, now the one that we do for most of what is in

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Chapter 5, and Chapter 4 actually, go to spreadsheets.

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Now I want you to prowl down here, present and future values.

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And of course I did it that way, you downloaded for God's sake.

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Okay.

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Okay, enable editing.

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No I don't want you to update because that will take until Jesus comes back.

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Okay here we go.

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Now this will do annuities, lump sums, annuity do, annuity essentially, any kind of annuity,

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ordinary annuity, annuity do.

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Now just a little background, assuming that you did have here this in accounting, but

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I'm going to repeat it.

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An annuity is a series of payments.

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It's a cash flow.

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So in other words, your payments on a car loan are an annuity.

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They are a level annuity.

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A level annuity is one where the payments are all the same.

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A non-level annuity is where the payments are different.

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So annuity.

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Now the last time I showed you lump sums, technically they are an annuity but there's

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only one cash flow.

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The one at the beginning or the one at the end.

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But talking more generally about annuities.

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They are a series of cash flows.

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Now the level is the one where they're all the same amount.

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Non-level, those are more custom.

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Like for example, suppose that I calculate the free cash flow, I project free cash flow

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for a company for the next, let's say 10 years.

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That would be a non-level annuity and we can bring it back to the present and find something

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like an intrinsic value of the company from that.

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Non-level, we'll see it later in the course where sometimes you can value a stock as a

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series of dividends streaming out until the dividends smooth.

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One year they're high, one year the dividends low, maybe the next year there's no dividend.

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So in other words, those are non-level.

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We deal with those a little later.

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They're a little more of a pain in the butt but Excel can do it a lot faster than a person

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can.

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And so help me, a chat GPT can do it in the blink of an eye.

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A level, non-level.

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Okay so the level are the ones, payments on loans or a level annuity, well I'll get into

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that in a minute.

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Now annuities are the ordinary annuity.

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Payments are at the end of periods.

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That would be like a car loan.

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You get your car loan, one month later your first payment's due.

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And then when you make your last payment, that's it.

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You got the car.

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Free title to the car.

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Now the annuity due, those are the ones where payments at beginning of periods.

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Typically these are the ones you would see for future values.

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Now where would you have an annuity where the payments would be due at the beginning

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of each period?

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Well that's interesting, I never thought of that one.

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Yeah, yeah that's not the one I usually use but I like that because they make you pay

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your rent right up front for the months that's following.

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Huh, not bad.

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Knock it off.

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No seriously.

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Okay I'm going to pick on you.

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Here's a classical one.

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You are a dynamic handsome young man, right?

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You have a significant other.

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And then she says three words that change your entire life.

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You know what those three words are?

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Not I love you.

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They are I am pregnant.

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Now that happened to me and my immediate thought was to kill myself, you know.

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Just end it right there, you know, fuck this.

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But instead you go with it and the birth happens.

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Now have you ever been to a childbirth?

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Yes.

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I know, it's exhausting isn't it?

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I was tired man.

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I mean I was worn out when it was over.

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But you finish and you drive, you take off from the hospital when everyone's finally

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gone to sleep and you think by gosh I am going to make it good for this kid.

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This kid will have go to college at Illinois State University.

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My God.

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So you first you stop at a burger joint and eat because you know you've got to you know

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regenerate all that strength that you had that wasted out.

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And then you go to the bank and you say okay every year on the child's birthday I shall

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put in $2,000.

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So each year starting at year zero you're going to put in $2,000.

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And then at the 17th birthday you will put in the last amount and then you will let it

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ride and on the kid's 18th birthday you will give the kid a check for what's in there.

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That's an annuity due.

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It's a classic annuity due.

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Financial planning oftentimes works on annuities too because if you are a financial planner

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you sit down with a couple and they explain to you what their needs are.

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I want new car.

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We'd like a new car every three years and we would like to have a really nice home in

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seven years and we'd like vacations, really nice vacation every other year and all this.

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So you calculate how much each of those is going to be out there in the future and what

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the payments will be so that each of those goals is achieved and then you have them write

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you a check for the total present value of those future amounts.

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When you go to them to tell them what it is you say right there write me this check now.

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So in other words these will be annuities due because you will have covered the amount

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one period before they need the money.

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That's how it will work.

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So those will be the same thing.

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They will be annuities due and then you will add them up and you'll have a total amount

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and you'll divide it among the payments for the different parts of it.

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Those are annuities due.

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So even though they sound like they're kind of weird they're not really that useful they

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are the essence of anything for the future.

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Go.

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Yeah as a matter of fact 529s yeah some well there are other ways you can do it too.

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Don't get me wrong that's the classic way now that's the preferred way now but you can

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do them a number of ways as a matter of fact that's one of the powers of financial planning

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and plugging our financial planning degree here we do have a financial planning institute

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it's one of the top rated in the country and this is the kind of stuff you do.

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You work these kinds of plans out for people and this is classic Excel stuff going through

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Excel and I've seen chat GPTs that can do this now too.

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You even just tell them what the goals are at the different points and they will grab

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interest rates or prevailing rates for long term annuities and give you a good answer

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and then you can some of them you can say well put this into Excel and so but it's a

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lot of it's good stuff because ultimately we're always going to have people who need

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financial planners who can do this kind of stuff and although wealth management is for

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upper middle class upper class people it also serves in a lot of venues for lower income

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people too because we can sit down with them and say okay let's see what it would take

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you to put out of your paycheck every month for you to be able to have the down payment

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on a home a decent home in five years or in three years okay let's see what else we can

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do for you as far as getting some financial organization to your future instead of them

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being forced to think about paycheck to paycheck kind of thing so it's not just for the wealthy

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this kind of stuff anyway those are annuities all the different things and flavors on

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annuities and they are stupidly easy to do in Excel and even on a financial calculator

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they're quite easy to do so what we do is and this is where it's a lot different for

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me now than it was even 10 years ago considering I was an early adopter we just have Excel

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do this and that's what this is all about right here present values and future values

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see those zeros and those ones down there that just tells you just to start it off that

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those are ordinary annuities one is an annuity do like that that's all there is to it now

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the drab I tried to make that peach and it looks more like you know brownish or whatever

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light brown don't touch those go in there and look at the formula so for example for

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the present value of an annuity well type oh that's an effective rate present value

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present value right there it is okay you will see that the way you create Excel don't

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ever put a number in a formula ever you call by reference formulas should not have numbers

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in them they should have that way the formula you don't have to play with the core you just

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change the numbers in here and you'll get what you want the white is where you can change

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a number the blue is what comes out of it the Browns are the ones that you don't touch

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in these and you'll get anything that you want out of the formula doing this now on

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another notice I it will spit out a negative present value I just put it as absolute calculators

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and Excel have a funny habit of wanting present values put in as negatives and they want the

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ants and they'll spit out answers of present values as negatives and that just looks a

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little bit weird so I make it an absolute but as you can see it's just a present value

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PV now this is something I don't like about Excel it's always been this way that's actually

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the present value of an annuity PV in Excel is is thinking you've got an annuity now you're

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saying oh well that wouldn't help me with a lump sum question well yeah it is suppose

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that we had just to do a lump sum with the present value suppose that in 15 years you're

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going to get a pile of money okay and here's one where I'm violating the Brown rule but

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there are no payments let's say that your interest rate is five point two five percent compounded

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quarterly and you're going to put you're going to get in 15 years let's say twenty thousand

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dollars there's the present value of it that's a lump sum so that goes back to what I was

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saying technically a lump sum is an annuity of one payment but instead let's suppose that

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we are over the next seven years with compounding twice a year and an APR of three point nine

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nine percent you'll put in two hundred dollars there won't be any kicker at the end there's

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how much you'll have at the end of seven years that's a classic ordinary present value of

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an ordinary annuity that fast you don't have to master the formula you have to master how

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to translate the word problem that I give you into an Excel problem into an Excel routine

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all you have to do is put the numbers in this is classic when I taught algebra I taught

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the students you get a word problem get rid of the words find the numbers find what they

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where they go in the formula now find the numbers and figure out where they go in the

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Excel sheet it's the same routine and this gives you the effective rate essentially an

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effective rate an effective rate is the rate that would be annual compounding that would

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be the same as the rate with the more than annual compounding like for example notice

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here suppose that if compounding were four times a year you have a little you there'd

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be a little more money to it but you also notice the effective rate would go up the

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annual rate of four point zero five percent compounded annually is equivalent to the APR

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of three point nine nine percent compounded quarterly do you follow it it's not hard just

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and like I said that one I was kind of cheating for a lump sum you will have to put in the

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FV but if it's a normal if it's a typical annuity there's no kicker at the end take

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it over here to a future value let's do that one 18 years and let's say that the compounding

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on it is oh you're going to put in payments every year so the compounding would be once

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a year and an APR of let's say four point two five percent and you're going to put in

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$2,000 every year that's how much you and notice down here it's one because it's an

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annuity do and notice that the effective rate is identical to the APR because it was only

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one compounding per year so you'll have a fifty two thousand four hundred eighty six

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dollar check to give the kid on his or her 18th birthday putting in two thousand dollars

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a year I can't emphasize that when we did these actually with the formula or even with

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the tables for God's sake it took a lot longer than it does now to do this well let's talk

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about this suppose that instead you put in a thousand dollars but you do it twice a year

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you notice now the effective rate diverges and you've got a little more not much more

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but you got a little more now payments on a loan this is a classic present value of

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an annuity because but you know the present value right away in this case let's say that

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you are going to buy a home on a 25 year mortgage normally for loans it's twelve periods per

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year and your APR is let's say six point three nine percent right now and there's no kicker

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and it's an ordinary annuity so there will be what I put in my present value let's say

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that you buy an ugly house for negative you have to put in a negative here I hate that

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but five thousand let's say hundred fifty thousand dollars those are your payments you

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follow with me play with it for God's sake don't ever save what you've done because then

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you'll have wiped out the core that's a big no-no I can even make this so that it's read

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only or something like that you can't save it but I don't but if you do see an improvement

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or something that you'd like to put in there by all means upgrade it but I mean this is

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actually this takes care right here of almost everything that would be required in chapter

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is that you see in chapter five there are a few tailing things like balance find the

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balance on a loan after a certain number of years and I can let you figure that out to

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give you a little bit of exercise with this kind of a model but this is actually very

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simple doesn't use V lookups and H lookups and all that kind of nonsense it just goes

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through and it makes it pretty easy for you to choose the numbers and put them in and

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then just get your answers out now I've done this for a number of the quantitative parts

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of the remainder of the course and the reason is that you will use Excel to do this in your

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work environment no one's going to say I want you to use this formula to calculate the present

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value they're going to expect you to know how to use Excel to do that to do things like

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that if it isn't already somewhere in your system already as a template and that's the

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reason I do it the way I do it here is so that you are getting the practice that you

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need to become proficient in Excel so that the rest of the courses that you do you don't

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have that geez so this is going to take forever you know how to create models in Excel and

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they don't have to be too complicated how many of you have started that on Wall Street

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prep course yet have any of you few of you have you run into the hard part the V lookups

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and the H lookups hate hate hate those and truth be told Wall Street prep is a little

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behind the curve now but it's still very much worth your while to have it done to get it

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done so or something that is roughly equivalent yeah that's the cow that's the calculated

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amount that's not the right color blue is it anyway yeah are you getting a different

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number did you put these in the same 6.39 that's weird did you get six point five eight

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out at the bottom that's a foreign yeah and that's an input wow that's bad I gotta fix

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it let me fix that right now that's you're right that should be a white my bad and this

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one should be a nice light blue nope little lighter blue there we go my apologies huh

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and interesting I'll upload that and fix that yeah that's an input yeah that's your input

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right there okay let me save that and upload it before the class is over but that is the

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extent of what you should be able to do now like I said there's a balance there's a couple

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problems where you figure out the balance on a loan and I leave that one out so that

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you can create in here if you want or in a copy of this a routine that will calculate

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the balance on a loan equals it's not balanced what is it I can't even remember right now

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it's not balanced I can't remember what it is I my mind is drawing a blank right now

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but it's something you can even Google to get it but you can do that one too but the

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core of your problems and what my expectations would be that you could do these on a quiz

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and or an exam just these so if you've mastered it you've got this all done any questions

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okay then I'm done with you get one of those early days out of here