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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 values and future values using Excel.

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This is a relatively short lecture because I am going to show you how to make it easy to do the problems

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that I would expect you to do on a quiz or an exam and it will be relatively straightforward

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in doing problems in your homework as well.

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The upshot of it is that you have to make sure that you know what my template in this case does.

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Where you put numbers in, where you don't put numbers, and where you kind of break a rule once or twice.

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But overall, this will make it a lot more efficient for you to do your work.

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And one of the big reasons is that you will be in corporate America, almost all of you will be.

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They will hand you Excel and often times you'll see they'll give you a spreadsheet that looks like some kind of ocean monster

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and you'll know kind of what to do and how to look at the sheet and you'll also know how to do a few things for yourself.

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Now later you'll build templates with me.

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The first one, this one for today's lecture, I've built it pretty much most of the way for you

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and so you can see the best practices as they come about in this.

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If you will bear with me one moment here, I want to look at something very quickly.

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Well, not too worried about that for the time being, but we'll get to that here in just a little bit.

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But before we do that, of course, we always like to have a look at the numbers.

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And as you can see, the numbers look kind of dim, but it's okay because the markets were closed today,

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the stock market and the bond market, this being a national holiday, President's Day, nothing happened today.

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However, the rest of the world that does not recognize our presidents as meriting a holiday in their countries,

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they were rolling right along. So we will move over here and the crude oil market would be a market that's global.

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And as you can see, it has punched a little ways through that upper line of that trading band that I've been talking about from 72 to 79.

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It's a little on the top side of that, but you notice that in the last couple of hours,

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the traders have chickened out and they're running back toward that upper bound there at 79.

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And why was it going up like that? Well, near midday, well, in the morning, there were rumors rumbling around,

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and I didn't get exactly who started them, but there were some concerns for something in the Middle East,

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and I don't know what it was, although it would probably have been something that would have indicated a potential expansion of the combat region,

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the active combat region. I don't know, though, but that seemed to spook the markets a while, but they're calming back down.

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They're not seeing any more shrapnel than usual, so it probably will find its way back down below that upper level of 79 by the evening.

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By this evening sometime, we hope. Gold seemed to get all kinds of excited, but then it lost its ambition.

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These are global markets again. These are not U.S. markets, so gold was, the gold bugs around the world were excited,

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but then they started selling off as they got the news that the rumors weren't so big after all.

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So running over here, now the bond markets closed because that's U.S. treasuries and that would be a U.S. market,

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but over here in Japan, they got spooked. They were up a little bit at the start last night, but then they got spooked,

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but again, you see that as the rumors calmed down, they began to crawl back up until by the end,

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they were virtually where they started, down just a measly 0.04%.

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London, by the time we got to London, they were all chipper and they had a little bit of an up day, but still it wasn't much of an up day at all.

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0.22% up from the start, nothing to really get excited about, so there's a lot of hold on, let's see what's coming next around the global markets.

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Now, just as a little bit going on and focusing on a company that is relatively local, but it also has some interesting things going on.

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Rivian, now remember, what you're going to see was Rivian at Friday. Nothing happened today, but there was an aftermarket.

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Now, the reason I'm showing you Rivian is this. Go down here, Rivian is going to announce its earnings on the 21st,

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so that would be that it's going to announce its earnings on Wednesday. Now, it's estimated it's going to lose money.

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It's been losing money all along. It's lost a lot of money, but always what it said its earnings would be were worse than what they actually reported.

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So the expectation is that right now they have projected that their earnings they will announce are going to be about negative $1.33 per share.

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The general sentiment is that they're always conservative, so they'll be a little better than that.

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But we see from the market, and it's hard to see anything, but if you'll notice it's a close on Friday.

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They were down, but then in the aftermarket they began to rise on Friday evening.

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That was rumors that it's going to be not as bad as they said they thought it would be.

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Those rumors we'll see on Tuesday, but I would imagine that from what I'm hearing the rumors are still that it's going to be a better report than what they said they thought it would be.

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So that will drive the rumors. The rumors will drive the pre-market tomorrow upward and probably through the day Rivian will find some wind in its sails and go up more.

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And so we should expect that when they give their estimate it will probably, their green dot will be maybe about there.

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But remember as I said, you buy on the rumors, you sell on the news.

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So if you're going to think that Rivian is going to go up, most likely that will happen before the earnings report.

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Because if the report is really better than what they estimate, it's already in the price because the rumors drove the price up.

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And anything after that will just be disappointment or well, we priced it correctly before it happened.

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So in the worst scenario, if they report earnings down here, then the stock is going to collapse in price.

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So any positive movement would probably happen tomorrow and possibly in the pre-market on Wednesday.

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But if they're like most companies, they announce their earnings early before the market opens.

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I don't know about that though. I didn't check when their earnings report will come out.

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But there you are. That gives you, now notice Rivian actually, if you look at it as an investment, it's extraordinarily risky at 2.08 on the beta.

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Losing money hand over fist, negative $6.02 per share, that's terrible. It's so bad that there's, well, we don't report a price earnings ratio if the earnings are negative.

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They don't pay a dividend. So if you are of the mind that this is going to be a play, you're taking a very big risk.

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Even if you're just doing a one day swing on the stock, it's still a very serious risk.

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So you have to decide, if you're the kind of investor who wants to take a very short risk, here's one you would take.

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But you also have to appreciate that you could very well come out with a lot less money than you went in, even for a one day hit on it.

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Now, notice something, one last thing here. Yahoo Finance, as well as other services, give one year projections where they think the stock is going to be in a year.

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Are they right? Well, whatever. You can do it as well as they can.

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Yahoo Finance is projecting that in a year, this company's stock is going to be $24.52 from where it is now at $16.37.

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So the projection is that it is going to be a winner over the next year. Do you believe that?

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Well, look at that beta and decide whether you want to take the risk of that or not.

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The rumors are that Rivian is being circled by a large company.

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Ford already has a 12% stake in Rivian right now and there are rumors of another car manufacturer, possibly European or Asian, circling Rivian too.

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That would all be really good news for the stock price if that really happens.

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But we'll see. That's how it works.

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Now, going to our fun for the day.

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And I did this last week and I'm going to bring it up again.

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In your canvas, files.

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Now in your files you want to find your spreadsheets.

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Now, I have, there is a template in here for almost everything that you would need to do quantitative problems from here out in the course.

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Almost everything.

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Now the ones that are in there, you can certainly augment them with a few extra stupid pet tricks if you want to.

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I caution you, if you modify a template, always save it as a copy, not as the original.

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Well, in this case you could still download the original.

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But you always want to do any extras, pretty them up or anything in somewhere else.

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But in the case of today, this is the present and future values spreadsheet. And you download it.

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And I encourage you to do this now.

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And there you have the core.

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It doesn't do you much good unless first you know what you're actually calculating.

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And also it helps for you to know how Excel is doing the calculations.

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Now I'm doing this one more pedantically, in other words, more step by step than I would the ones later than this.

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So you can see how the architecture of a good spreadsheet is created.

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And I'm not doing everything that I could do in this, macros and pivot tables and all that.

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You don't really have to be a genius at Excel to use it very effectively in a class like this.

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We, as I told you, many, many, many years ago we used formulas, tables, and then financial calculators.

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Well, in the workplace that is out there now, Excel is absolutely imperative.

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Most companies are living in Excel.

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Now in a couple of years, I'm already starting this in my advanced classes, you'll be using chat GPTs to do them.

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They will maybe work with Excel, but it will get to the point where even Excel will be somewhat obsolete.

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You guys are living in a very fast changing technological environment.

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I won't show you chat GPTs here, but if you want to know about them, I can show them to you in my office.

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But let me take this off the board, everything I've got here, and we're going to start this over here with annuities.

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An annuity is a stream of cash.

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You get $10 today, $20 tomorrow, $30 next week.

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It's just clumps of money.

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Now the one I taught you last week was just a lump sum.

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What's the present value of $15,000 that you'll get in 18 years at 5.25% compounded quarterly?

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This is multiple in a periodic fashion.

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Now technically a lump sum is an annuity with just one cash flow, one payment.

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But that's kind of a trivial one.

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And in fact, the spreadsheets that I've got for you, you can actually trick it into doing the lump sum calculations as well as more traditional annuities.

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Now there are level annuities, it's the same amount periodically.

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Like for example, your payment on a car loan, that is a level annuity.

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It's the same amount every time.

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You pay the same amount in each payment until you're done.

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Or they took your car away in repo.

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These are very common.

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Anything that's a payment, most payment structures are level annuities.

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Nothing big about that.

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Non-level annuities, which we don't deal with now, we do deal with them later in the semester, those are where it's not the same amount every time.

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Think about this.

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Suppose I'm projecting the free cash flow for 10 years out for a company.

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Now if I find the present value of those, I've got a pretty good estimate of the value of the company intrinsic value right now.

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But those are certainly not going to be the same amount every time in the annuity stream.

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That would be a non-level annuity.

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Dividends that a company pays, oftentimes we will value a company by the present value of its future expected dividends.

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Pull them back to the present, figure out what it is.

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Those dividends are probably not going to be the same.

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Especially in a young company, they might have a little dividend next year, a nicer dividend the year after that, maybe no dividend the year after that.

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So those can be non-level annuities.

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And that's where things like Excel come in to their excellence, because in Excel you can just give it each one of them, say find the present value of each of those, and add them up.

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Very easy.

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Okay, non-level.

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Now I know that most of this was covered in your accounting classes, but now you're getting it from a great professor like me, so I'm repeating what you probably already know.

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Ordinary annuity.

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An ordinary annuity is where the payments occur at the end of every period.

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You borrowed money for a car.

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You'll make your first payment a month after you get the loan, probably.

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So it will be at the end of each period that you'll get it.

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Ordinary annuities are the basis for almost all loans.

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You assume that the payment is at the end of each period, and a lot of loans are 12 payments a year every month, so your compounding period is 12.

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Nothing really complicated about that one right there.

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Ordinary annuities kind of are the rock-solid basis.

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The other side of it, though, is the annuity due.

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Those, the payments begin at the beginning of every period.

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So your first payment is right away.

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That's a little bit different.

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Now those are actually not that unusual.

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Like, for example, your rent is an annuity due because when you sign your lease agreement, you pay your deposit and your first month's rent.

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So those payments begin at the start of every period.

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Another example, and this comes from the world of financial planning, and plugging, we do have a financial planning degree here.

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We have a financial planning institute, which is nationally ranked.

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Here's how it would work.

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You, madam, I'm a financial planner.

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You come to me and say, I want to make all my dreams come true.

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And of course, first thing I think is, well, I'm here, so there you are.

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Oh, sorry.

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But you say, okay, I should like to have a new car every three years.

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I should like to have a really fabulous European vacation every five years.

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And oh, by the way, I have two kids, one's six and one's eight.

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The six-year-old is, he's got to go to college.

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The eight-year-old, he's kind of stupid, but we're going to put both of them in college.

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So I want to have the money to pay their tuition for four years of college when that happens.

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Okay, so what's going on here is that you have a timeline,

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and along this timeline are different amounts of money that you will need to achieve.

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Some of them will have the same timeline repeating itself over and over.

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Some of them will have timelines way out.

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Some of them will have timelines that are closer in.

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You want to buy a house and you want to have a nice down payment in seven years.

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All those, that's what a financial planner will assess.

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How much are each of those amounts and when will you have to have that money?

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And so what we will do is we'll figure out the payment stream that would get you to this one.

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To this one, to this one, and to this one.

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And how much you have to put in the bank so that the future value of each of those

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was achieved through the payments for that.

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We add those up and I say write me a check for that total amount,

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and every year or every six months or whatever you write me another check

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so that I create so that the future value of this annuity due right here

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will achieve each of these along the way.

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That's what financial planning is at its heart.

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You write me that one check and then I distribute the payments

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so that they build, each one builds up so that it hits the goal.

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So that one month or one quarter or one year,

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before any of them is due, you've got the money for it.

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That's a classic example of an annuity due.

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I'll give you another good example.

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I'm trying to think.

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I better not bother you.

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You look like you've had a hard day.

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Yes, sir.

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You have a significant other.

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A significant other.

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And this significant other comes to you one night and she says

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those three words that change your life.

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No, the three words aren't I love you.

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They are I am pregnant.

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It happened to me, bruh.

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I didn't have a razor blade to kill myself.

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Well, it turned out nine months later, well, there it was.

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I've been at five of those in my life.

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Let me tell you, it's exhausting.

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I was so worn out after the birth.

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No, seriously, it was rough.

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She seemed to have a problem too,

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but for me personally, I had things to do that day.

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So anyway, you get through the birth and you got that thing

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happens that the kid shows up and you say I'm Taddy.

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Oh, God.

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And so the first thing you do, you leave the hospital and you

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go to Burger King and get yourself a Whopper and then you

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00:23:32,000 --> 00:23:35,000
think I got to take care of this kid.

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00:23:35,000 --> 00:23:40,000
I want to make sure this kid goes to college at Illinois

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00:23:40,000 --> 00:23:45,000
State University and maybe that old geezer finance professor

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00:23:45,000 --> 00:23:49,000
will still be there and corrupt his life too.

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00:23:49,000 --> 00:23:55,000
Anyway, so you go right to the bank on the kid's birthday and

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00:23:55,000 --> 00:24:00,000
you put in $2,000 and every year on the kid's birthday you put

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00:24:00,000 --> 00:24:03,000
in $2,000.

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00:24:03,000 --> 00:24:06,000
You put in your last payment when the kid is 17.

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00:24:06,000 --> 00:24:10,000
That would make a total of 18 payments, right?

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00:24:10,000 --> 00:24:12,000
Okay, 18 payments.

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00:24:12,000 --> 00:24:15,000
So you let the whole mess ride for one year,

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00:24:15,000 --> 00:24:18,000
you take it out and you give them a check.

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00:24:18,000 --> 00:24:20,000
Here it is.

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00:24:20,000 --> 00:24:22,000
I've been saving this all these years.

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00:24:22,000 --> 00:24:26,000
That is a classic annuity deal.

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00:24:26,000 --> 00:24:31,000
$2,000 a year, payments at the beginning of each period.

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00:24:31,000 --> 00:24:33,000
That's an annuity deal.

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00:24:33,000 --> 00:24:38,000
That's very similar to 529s, all these raw things.

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00:24:38,000 --> 00:24:41,000
You put your money in at the beginning and then that last

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00:24:41,000 --> 00:24:46,000
one along with all the others rides one period more and then

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00:24:46,000 --> 00:24:47,000
you pull it out.

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00:24:47,000 --> 00:24:49,000
That's how it works.

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00:24:49,000 --> 00:24:53,000
So the annuity due is actually, even though it seems a little

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00:24:53,000 --> 00:24:56,000
odd at first, payments at the beginning of every period,

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00:24:56,000 --> 00:25:03,000
it's actually the foundation of a lot of financial responsibility.

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00:25:03,000 --> 00:25:08,000
Like if you wanted, you finally realize I want to own a home.

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00:25:08,000 --> 00:25:11,000
I want my own house in five years.

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00:25:11,000 --> 00:25:16,000
Well, then you start putting payments, money in to an account

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00:25:16,000 --> 00:25:19,000
for a down payment so that you get a better interest rate and

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00:25:19,000 --> 00:25:20,000
all that.

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00:25:20,000 --> 00:25:23,000
Well, you're going to start those and then the last payment

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00:25:23,000 --> 00:25:27,000
you put in would be about a month before you pull it out to

244
00:25:27,000 --> 00:25:30,000
make that down payment when you're getting the mortgage

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00:25:30,000 --> 00:25:31,000
loan.

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00:25:31,000 --> 00:25:33,000
That's how these work.

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00:25:33,000 --> 00:25:36,000
So there's the foundation of what we're doing.

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00:25:36,000 --> 00:25:41,000
Now let's go back through and let's let Excel do all the

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00:25:41,000 --> 00:25:45,000
heavy lifting because every one of these, present value,

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00:25:45,000 --> 00:25:49,000
payments on a loan, future value, these are just classic

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00:25:49,000 --> 00:25:53,000
annuities and they're all level annuities, which is all we

252
00:25:53,000 --> 00:25:55,000
really care about at this point.

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00:25:55,000 --> 00:25:58,000
Now if you've got a non-level annuity, you can just take

254
00:25:58,000 --> 00:26:02,000
present value of each of them and add them up, but that's a

255
00:26:02,000 --> 00:26:03,000
pain in the butt.

256
00:26:03,000 --> 00:26:08,000
But anyway, now let me bring up something here.

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00:26:08,000 --> 00:26:11,000
You've got, in the way I construct these sheets, and

258
00:26:11,000 --> 00:26:16,000
these are not the super great awesome.

259
00:26:16,000 --> 00:26:20,000
I don't use things like pivot tables and other things.

260
00:26:20,000 --> 00:26:23,000
I don't want you to be completely confused by them.

261
00:26:23,000 --> 00:26:26,000
But there are a couple of things that I want to point out.

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00:26:26,000 --> 00:26:30,000
First of all, white are the numbers you put in, in the

263
00:26:30,000 --> 00:26:31,000
white cells.

264
00:26:31,000 --> 00:26:41,000
And this is the way I taught lower level math for many,

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00:26:41,000 --> 00:26:42,000
many years.

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00:26:42,000 --> 00:26:45,000
I tell people, get, it's a word problem.

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00:26:45,000 --> 00:26:50,000
Get rid of the words, pull the numbers, those are what you're

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00:26:50,000 --> 00:26:51,000
going to need.

269
00:26:51,000 --> 00:26:53,000
You just need to know what number goes where.

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00:26:53,000 --> 00:26:56,000
And that's what the words were there to tell you.

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00:26:56,000 --> 00:26:58,000
Once you've got the numbers and you know where they belong,

272
00:26:58,000 --> 00:27:02,000
just stick the numbers in, in the white areas.

273
00:27:02,000 --> 00:27:10,000
What will come out is the blue is your result, your answer.

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00:27:10,000 --> 00:27:14,000
What you will put on your Canvas exam, that's what you will

275
00:27:14,000 --> 00:27:15,000
put out there.

276
00:27:15,000 --> 00:27:22,000
Normally I round these to two decimal places, but my usual

277
00:27:22,000 --> 00:27:26,000
for dollar amounts, I say to the nearest dollar.

278
00:27:26,000 --> 00:27:29,000
So you can round it down if you want.

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00:27:29,000 --> 00:27:34,000
Now the orange, or whatever color that looks like up there

280
00:27:34,000 --> 00:27:41,000
on that projector, the orange is thou shalt not touch these.

281
00:27:41,000 --> 00:27:48,000
Although there's one exception, one place where you can pull a

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00:27:48,000 --> 00:27:49,000
little trick.

283
00:27:49,000 --> 00:27:52,000
I'll show it to you, but it's not necessary for the time

284
00:27:52,000 --> 00:27:53,000
being.

285
00:27:53,000 --> 00:28:07,000
But, so for example, let's take a problem where you, madam, are

286
00:28:07,000 --> 00:28:19,000
going to get $300 a month for the next ten years.

287
00:28:19,000 --> 00:28:43,000
You'll get $300 every month for the next ten years.

288
00:28:43,000 --> 00:28:58,000
If you discount, what the hell?

289
00:28:58,000 --> 00:29:03,000
I lost my track.

290
00:29:03,000 --> 00:29:06,000
Cash flow.

291
00:29:06,000 --> 00:29:11,000
Wow.

292
00:29:11,000 --> 00:29:14,000
I get confused when they ask if I want extra cheese on my

293
00:29:14,000 --> 00:29:15,000
burger.

294
00:29:15,000 --> 00:29:24,000
Cash flows at 3.49%.

295
00:29:24,000 --> 00:29:46,000
What is the present value of this annuity?

296
00:29:46,000 --> 00:29:50,000
You will get $300 every month for the next ten years if you

297
00:29:50,000 --> 00:29:54,000
discount the cash flows at 3.49%.

298
00:29:54,000 --> 00:29:57,000
What is the present value of this amount?

299
00:29:57,000 --> 00:30:03,000
So this is a classic present value of an annuity.

300
00:30:03,000 --> 00:30:07,000
And I will not throw at you something weird.

301
00:30:07,000 --> 00:30:13,000
Present values are almost always ordinary annuities.

302
00:30:13,000 --> 00:30:18,000
Future values are almost always annuity due.

303
00:30:18,000 --> 00:30:21,000
And they will always, in both cases, be that way on anything

304
00:30:21,000 --> 00:30:22,000
I would ask you.

305
00:30:22,000 --> 00:30:25,000
Where do you put that?

306
00:30:25,000 --> 00:30:32,000
You see this type in Excel, a zero in a financial formula

307
00:30:32,000 --> 00:30:34,000
says ordinary annuity.

308
00:30:34,000 --> 00:30:38,000
A one says annuity due.

309
00:30:38,000 --> 00:30:39,000
Okay?

310
00:30:39,000 --> 00:30:40,000
I put them in there.

311
00:30:40,000 --> 00:30:41,000
Don't change them.

312
00:30:41,000 --> 00:30:47,000
That's why it's in the orange zone.

313
00:30:47,000 --> 00:30:50,000
So now we're going to go through, how many years is it?

314
00:30:50,000 --> 00:30:51,000
Ten.

315
00:30:51,000 --> 00:30:53,000
How many periods per year?

316
00:30:53,000 --> 00:30:56,000
Well, I said every month, so that's 12.

317
00:30:56,000 --> 00:30:58,000
What's the APR?

318
00:30:58,000 --> 00:31:01,000
3.49.

319
00:31:01,000 --> 00:31:02,000
You see how I'm putting it in?

320
00:31:02,000 --> 00:31:06,000
I've already set it up so that as you type in 3.49, it's

321
00:31:06,000 --> 00:31:09,000
automatically turning it into a percent.

322
00:31:09,000 --> 00:31:12,000
And what are the payments?

323
00:31:12,000 --> 00:31:14,000
Oh, $300.

324
00:31:14,000 --> 00:31:20,000
And there it is.

325
00:31:20,000 --> 00:31:21,000
There's your answer.

326
00:31:21,000 --> 00:31:24,000
The present value is $30,352.

327
00:31:24,000 --> 00:31:27,000
Yeah?

328
00:31:27,000 --> 00:31:30,000
Are we able to do this in the next half of the first?

329
00:31:30,000 --> 00:31:33,000
I want you to.

330
00:31:33,000 --> 00:31:34,000
Sounds good.

331
00:31:34,000 --> 00:31:36,000
Yeah, I know, right?

332
00:31:36,000 --> 00:31:39,000
They call me Pizza Hut because I deliver.

333
00:31:39,000 --> 00:31:49,000
That's because you're cheesy, Prof.

334
00:31:49,000 --> 00:31:55,000
Where the hell was I?

335
00:31:55,000 --> 00:31:56,000
Okay.

336
00:31:56,000 --> 00:31:59,000
You see the effective rate?

337
00:31:59,000 --> 00:32:01,000
There's a formula for it in the book.

338
00:32:01,000 --> 00:32:07,000
What that does, the effective rate just says that 3.49%

339
00:32:07,000 --> 00:32:10,000
compounded 12 times a year.

340
00:32:10,000 --> 00:32:15,000
What equivalent rate would compound once every year?

341
00:32:15,000 --> 00:32:19,000
We do that so that if you've got one thing that does

342
00:32:19,000 --> 00:32:22,000
quarterly compounding, another does monthly, another does

343
00:32:22,000 --> 00:32:26,000
weekly, the effective rate makes them all in the same

344
00:32:26,000 --> 00:32:28,000
units, annual.

345
00:32:28,000 --> 00:32:31,000
That's all effective rate does.

346
00:32:31,000 --> 00:32:35,000
And you notice it's calculated for you.

347
00:32:35,000 --> 00:32:38,000
You don't have to worry about it.

348
00:32:38,000 --> 00:32:42,000
And so the only things that you ever have to worry about

349
00:32:42,000 --> 00:32:48,000
are the years, how many times a year, what the APR is,

350
00:32:48,000 --> 00:32:50,000
and how much you're putting in.

351
00:32:50,000 --> 00:33:01,000
That's all you have to do, and it happens for you.

352
00:33:01,000 --> 00:33:08,000
Now, let's do that one where we're looking to see how

353
00:33:08,000 --> 00:33:13,000
much that check would be for the kid on his or her 18th

354
00:33:13,000 --> 00:33:15,000
birthday.

355
00:33:15,000 --> 00:33:29,000
So we said we're going to put in $2,000 every year.

356
00:33:29,000 --> 00:33:47,000
Let's say the rate is 4.35%.

357
00:33:47,000 --> 00:33:59,000
And we're going to do that for 18 years.

358
00:33:59,000 --> 00:34:01,000
Now, be careful about counting years.

359
00:34:01,000 --> 00:34:04,000
I sometimes have to do this on my fingers.

360
00:34:04,000 --> 00:34:09,000
It's the zero, when the kid was born, that was year one.

361
00:34:09,000 --> 00:34:14,000
And then you do 17 more to the kid getting to 17.

362
00:34:14,000 --> 00:34:16,000
So that's a total of 18 there.

363
00:34:16,000 --> 00:34:18,000
I don't want to complicate it too much, but there are a

364
00:34:18,000 --> 00:34:19,000
total of 18.

365
00:34:19,000 --> 00:34:23,000
And then that last one you stop and you just let all the

366
00:34:23,000 --> 00:34:26,000
interest from all the payments accumulate, and then you

367
00:34:26,000 --> 00:34:29,000
pull it out at the end of that last year.

368
00:34:29,000 --> 00:34:35,000
So in this case, we're going to do future value annuity.

369
00:34:35,000 --> 00:34:40,000
We are going to do 18 years, and it's going to be one

370
00:34:40,000 --> 00:34:41,000
period per year.

371
00:34:41,000 --> 00:34:43,000
You're doing it every year.

372
00:34:43,000 --> 00:34:58,000
And our APR is 4.35%, and the payments are going to be $2,000.

373
00:34:58,000 --> 00:35:07,000
So you will have $52,973.

374
00:35:07,000 --> 00:35:10,000
That's it.

375
00:35:10,000 --> 00:35:12,000
I guarantee you these problems, if you've done them

376
00:35:12,000 --> 00:35:18,000
before with tables or with a formula, they're a lot longer.

377
00:35:18,000 --> 00:35:20,000
Now, I'm going to help you out with a couple of other things.

378
00:35:20,000 --> 00:35:23,000
But one thing, well, notice here.

379
00:35:23,000 --> 00:35:27,000
Do you see how the effective rate was the same as the APR

380
00:35:27,000 --> 00:35:30,000
because there was only one compounding per year?

381
00:35:30,000 --> 00:35:34,000
So you didn't get that extra boost of recalculation of

382
00:35:34,000 --> 00:35:35,000
interest.

383
00:35:35,000 --> 00:35:37,000
Now, suppose, watch this.

384
00:35:37,000 --> 00:35:40,000
Now, remember the amount, 52,973.

385
00:35:40,000 --> 00:35:49,000
Now, suppose that I had done two a year, $1,000 each.

386
00:35:49,000 --> 00:35:52,000
See how you would have had a little more because it was

387
00:35:52,000 --> 00:35:54,000
gaining interest faster?

388
00:35:54,000 --> 00:35:57,000
And notice now that the effective rate is a little

389
00:35:57,000 --> 00:36:04,000
boosted above the APR.

390
00:36:04,000 --> 00:36:05,000
I could even do it this.

391
00:36:05,000 --> 00:36:06,000
Watch what happens.

392
00:36:06,000 --> 00:36:13,000
If I do four payments a year, $500 each, see how you get

393
00:36:13,000 --> 00:36:16,000
even a little more because you're recalculating interest

394
00:36:16,000 --> 00:36:17,000
at a faster rate.

395
00:36:17,000 --> 00:36:20,000
Every time you put in a payment, interest recalculates.

396
00:36:20,000 --> 00:36:26,000
So in this case, you have a little more as the check at 18

397
00:36:26,000 --> 00:36:30,000
years old and the effective rate is even still a little

398
00:36:30,000 --> 00:36:32,000
better.

399
00:36:32,000 --> 00:36:35,000
So there you go.

400
00:36:35,000 --> 00:36:38,000
Now, let me take you back here.

401
00:36:38,000 --> 00:36:42,000
I'm going to do this with this.

402
00:36:42,000 --> 00:36:44,000
Now, first of all, this ABS.

403
00:36:44,000 --> 00:36:48,000
As I told you on Wednesday of last week, financial

404
00:36:48,000 --> 00:36:53,000
calculators in Excel have this thing about negatives on

405
00:36:53,000 --> 00:36:55,000
present values.

406
00:36:55,000 --> 00:37:00,000
If something has a, if you're calculating a present value,

407
00:37:00,000 --> 00:37:02,000
it will give you a negative.

408
00:37:02,000 --> 00:37:05,000
If you put in a present value, it will come out as a

409
00:37:05,000 --> 00:37:08,000
negative.

410
00:37:08,000 --> 00:37:09,000
You should put it in.

411
00:37:09,000 --> 00:37:10,000
I'm sorry.

412
00:37:10,000 --> 00:37:12,000
If you need to put in a present value, you should put

413
00:37:12,000 --> 00:37:13,000
it in as a negative.

414
00:37:13,000 --> 00:37:16,000
So that's what that absolute value is.

415
00:37:16,000 --> 00:37:19,000
Now, going to the core function, though, if you look at

416
00:37:19,000 --> 00:37:24,000
the core function, to calculate annuities, the Excel

417
00:37:24,000 --> 00:37:28,000
calling function is PV.

418
00:37:28,000 --> 00:37:32,000
Long ago, we gave up on trying to get Microsoft to say

419
00:37:32,000 --> 00:37:34,000
that was PVA.

420
00:37:34,000 --> 00:37:35,000
It wasn't just a present value.

421
00:37:35,000 --> 00:37:40,000
It's a present value of an annuity, for God's sake.

422
00:37:40,000 --> 00:37:44,000
Unfortunately, it's kind of a misnomer.

423
00:37:44,000 --> 00:37:48,000
And also, their number, something we'll do in just a

424
00:37:48,000 --> 00:37:53,000
few weeks is NPV, net present value, which they don't

425
00:37:53,000 --> 00:37:57,000
do the way it's supposed to be done, but they rule the

426
00:37:57,000 --> 00:38:01,000
universe, so I have to modify what I teach you to do it

427
00:38:01,000 --> 00:38:02,000
in Excel.

428
00:38:02,000 --> 00:38:06,000
But one way or the other, notice something in the

429
00:38:06,000 --> 00:38:07,000
formula.

430
00:38:07,000 --> 00:38:10,000
There are no numbers in the formula.

431
00:38:10,000 --> 00:38:13,000
This is Excel best practices.

432
00:38:13,000 --> 00:38:17,000
You don't ever put numbers into a formula.

433
00:38:17,000 --> 00:38:21,000
You call those numbers from someplace else.

434
00:38:21,000 --> 00:38:26,000
You call by reference.

435
00:38:26,000 --> 00:38:28,000
This is best practices.

436
00:38:28,000 --> 00:38:33,000
The reason, the big reason is that, did you see how I

437
00:38:33,000 --> 00:38:37,000
was changing the numbers up here in the white zone and

438
00:38:37,000 --> 00:38:40,000
it was automatically recalculating?

439
00:38:40,000 --> 00:38:42,000
That's why.

440
00:38:42,000 --> 00:38:48,000
You want to leave that core formula with just what you

441
00:38:48,000 --> 00:38:51,000
tell it from other places.

442
00:38:51,000 --> 00:38:55,000
This is going to be the case all through Excel.

443
00:38:55,000 --> 00:38:58,000
You don't ever want to put numbers in a formula.

444
00:38:58,000 --> 00:39:00,000
You want to call them from someplace else.

445
00:39:00,000 --> 00:39:03,000
In fact, this isn't just Excel.

446
00:39:03,000 --> 00:39:07,000
If any of you ever step into the world of web page design,

447
00:39:07,000 --> 00:39:12,000
long, long ago, I wrote the web pages that were in the

448
00:39:12,000 --> 00:39:14,000
very early days of the internet.

449
00:39:14,000 --> 00:39:16,000
We would put a web page.

450
00:39:16,000 --> 00:39:19,000
You'd have do this, make it pretty, make it bold, make it

451
00:39:19,000 --> 00:39:22,000
italics, then you'd give it the text, and then you'd close

452
00:39:22,000 --> 00:39:25,000
the text with div symbols and go on.

453
00:39:25,000 --> 00:39:28,000
We don't do that ever anymore.

454
00:39:28,000 --> 00:39:31,000
If you look at the index page, the page that you actually

455
00:39:31,000 --> 00:39:36,000
call when you type in a URL or click on a link, that is

456
00:39:36,000 --> 00:39:39,000
nothing but formulas.

457
00:39:39,000 --> 00:39:45,000
It calls everything like text and even the colors from

458
00:39:45,000 --> 00:39:47,000
files.

459
00:39:47,000 --> 00:39:53,000
The actual web page itself is just a bunch of code.

460
00:39:53,000 --> 00:39:55,000
You don't see anything there.

461
00:39:55,000 --> 00:39:57,000
So I have web pages.

462
00:39:57,000 --> 00:40:02,000
Okay, I want to put in a feature, a new pretty picture of mine.

463
00:40:02,000 --> 00:40:04,000
I don't stick the picture in the web page.

464
00:40:04,000 --> 00:40:08,000
I stick it in the file that the web page calls when someone

465
00:40:08,000 --> 00:40:11,000
goes to the website.

466
00:40:11,000 --> 00:40:16,000
In my news articles that I used to do, I didn't put news in

467
00:40:16,000 --> 00:40:19,000
the page that people called.

468
00:40:19,000 --> 00:40:22,000
I put it in a file so that when the news changed, I'd just

469
00:40:22,000 --> 00:40:25,000
change the text in the file and call it in, make it pretty,

470
00:40:25,000 --> 00:40:27,000
and all of that.

471
00:40:27,000 --> 00:40:30,000
That's best practices in Excel.

472
00:40:30,000 --> 00:40:33,000
It's what you have to learn to be able to use Excel

473
00:40:33,000 --> 00:40:35,000
effectively in corporate.

474
00:40:35,000 --> 00:40:36,000
That's why it's scary.

475
00:40:36,000 --> 00:40:39,000
The first time you look at a corporate spreadsheet and you

476
00:40:39,000 --> 00:40:42,000
try to look at the formulas, what the hell am I looking at?

477
00:40:42,000 --> 00:40:43,000
Where are the numbers?

478
00:40:43,000 --> 00:40:45,000
Well, they aren't there because those numbers are being

479
00:40:45,000 --> 00:40:49,000
called from other files that are being pulled in or other

480
00:40:49,000 --> 00:40:54,000
worksheets that are being called to this one.

481
00:40:54,000 --> 00:40:57,000
This is something for you to know right now as you begin to

482
00:40:57,000 --> 00:40:59,000
do your design.

483
00:40:59,000 --> 00:41:02,000
Now we've got payments on a loan.

484
00:41:02,000 --> 00:41:09,000
Who do I use?

485
00:41:09,000 --> 00:41:11,000
You, madam.

486
00:41:11,000 --> 00:41:13,000
You want to live the dream.

487
00:41:13,000 --> 00:41:20,000
You want your own house trailer on the outskirts of Decatur,

488
00:41:20,000 --> 00:41:24,000
double wide.

489
00:41:24,000 --> 00:41:28,000
Your parents, they're kind of double wide, so they have to

490
00:41:28,000 --> 00:41:30,000
visit, they don't want to be cramped.

491
00:41:30,000 --> 00:41:35,000
Now, madam, you decide I should have to get a loan for this.

492
00:41:35,000 --> 00:41:40,000
Let's say I'm going to go for the deluxe, $150,000, and you've

493
00:41:40,000 --> 00:41:45,000
got a lender who will lend you that money on a 25-year loan

494
00:41:45,000 --> 00:41:51,000
with an APR of 6.39%.

495
00:41:51,000 --> 00:41:54,000
So remember the numbers, 150,000.

496
00:41:54,000 --> 00:41:56,000
That is going to come now.

497
00:41:56,000 --> 00:41:59,000
That is a present value.

498
00:41:59,000 --> 00:42:01,000
You have to have that now to buy the house.

499
00:42:01,000 --> 00:42:02,000
Okay?

500
00:42:02,000 --> 00:42:04,000
So we're going to go to payments on the loan.

501
00:42:04,000 --> 00:42:07,000
So we're going to, as I said, we'll have a 25-year loan.

502
00:42:07,000 --> 00:42:10,000
There it is.

503
00:42:10,000 --> 00:42:12,000
Now, the periods per year, 12.

504
00:42:12,000 --> 00:42:16,000
Now, I didn't say 12 anywhere in that description, but I

505
00:42:16,000 --> 00:42:19,000
implied it because you're going to make monthly payments.

506
00:42:19,000 --> 00:42:24,000
The payment structure determines the compoundings.

507
00:42:24,000 --> 00:42:27,000
If I had said you will make your payments every other month,

508
00:42:27,000 --> 00:42:30,000
that would have been six.

509
00:42:30,000 --> 00:42:33,000
I would not have had to say six compoundings per year.

510
00:42:33,000 --> 00:42:37,000
If you're going to make your payments bi-weekly, that would

511
00:42:37,000 --> 00:42:42,000
have been 20, bi-weekly, 26.

512
00:42:42,000 --> 00:42:44,000
So now we go down.

513
00:42:44,000 --> 00:42:48,000
The APR was 6.39%.

514
00:42:48,000 --> 00:42:50,000
There's no future value.

515
00:42:50,000 --> 00:42:53,000
Now, here's where you have to remember, that present values

516
00:42:53,000 --> 00:42:56,000
you key in as negatives.

517
00:42:56,000 --> 00:43:02,000
So it's going to be negative $150,000.

518
00:43:02,000 --> 00:43:05,000
I tried to figure out a way to do that without getting into

519
00:43:05,000 --> 00:43:08,000
too much complication of the code, and I just gave up.

520
00:43:08,000 --> 00:43:10,000
Just remember that in payments on a loan, you have to put it

521
00:43:10,000 --> 00:43:12,000
in a negative.

522
00:43:12,000 --> 00:43:16,000
You'll know you didn't do that because your answer will look

523
00:43:16,000 --> 00:43:18,000
really weird.

524
00:43:18,000 --> 00:43:24,000
But now the payments, $1,002.52 a month.

525
00:43:24,000 --> 00:43:27,000
That's all there was to it.

526
00:43:27,000 --> 00:43:33,000
The effective rate on loan is 6.58%.

527
00:43:33,000 --> 00:43:36,000
That fast.

528
00:43:36,000 --> 00:43:38,000
And you can do all this.

529
00:43:38,000 --> 00:43:43,000
This sheet is, I expect you to pull this up.

530
00:43:43,000 --> 00:43:47,000
You can use tables if you want, like they do in accounting,

531
00:43:47,000 --> 00:43:50,000
or you can use a financial calculator if you wish to.

532
00:43:50,000 --> 00:43:54,000
Or you can actually use a calculator with the formula

533
00:43:54,000 --> 00:43:56,000
that they give you in the book.

534
00:43:56,000 --> 00:44:00,000
If you want to do it the really butch way.

535
00:44:00,000 --> 00:44:03,000
But we are in the 21st century, and I can't prepare you

536
00:44:03,000 --> 00:44:06,000
for jobs in the 20th century.

537
00:44:06,000 --> 00:44:09,000
Matter of fact, I can't even prepare you for jobs that would

538
00:44:09,000 --> 00:44:12,000
have been there five years ago.

539
00:44:12,000 --> 00:44:15,000
So here we are, right here.

540
00:44:15,000 --> 00:44:21,000
Now, I leave one little thing, just kind of leave it for you.

541
00:44:21,000 --> 00:44:23,000
You can actually, there's a formula, and I'm going to let

542
00:44:23,000 --> 00:44:25,000
you figure it out for yourself.

543
00:44:25,000 --> 00:44:27,000
I'll show you on Wednesday.

544
00:44:27,000 --> 00:44:31,000
But there's a way you can figure out how much you still owe

545
00:44:31,000 --> 00:44:35,000
on the loan after a certain number of years.

546
00:44:35,000 --> 00:44:39,000
There's an Excel calling function to find out the balance

547
00:44:39,000 --> 00:44:42,000
on a loan after a certain number.

548
00:44:42,000 --> 00:44:46,000
Now, remember, everything is actually in months here.

549
00:44:46,000 --> 00:44:50,000
So in order to do it, you always would have to do, like after

550
00:44:50,000 --> 00:44:54,000
20 years, you do 20 times 12, so that was in months.

551
00:44:54,000 --> 00:44:58,000
Because it thinks you want everything in months.

552
00:44:58,000 --> 00:45:02,000
So remember that in any kind of a calculation that you would do,

553
00:45:02,000 --> 00:45:06,000
you would always want to tell us what you want in months.

554
00:45:06,000 --> 00:45:14,000
Look here, let me show you something.

555
00:45:14,000 --> 00:45:15,000
Number of periods.

556
00:45:15,000 --> 00:45:21,000
Do you see how the number of periods there was, I had the

557
00:45:21,000 --> 00:45:27,000
times, the 10 times 12, B2 times B3.

558
00:45:27,000 --> 00:45:29,000
Why did I do a B4?

559
00:45:29,000 --> 00:45:31,000
Oh, APR, okay.

560
00:45:31,000 --> 00:45:37,000
And the number of periods, there it is, B3 times B2.

561
00:45:37,000 --> 00:45:40,000
In other words, remember that I have to turn it into months,

562
00:45:40,000 --> 00:45:42,000
years times months.

563
00:45:42,000 --> 00:45:46,000
Whenever you do anything with a financial calculation, you'll

564
00:45:46,000 --> 00:45:54,000
probably have that years times months cell references.

565
00:45:54,000 --> 00:45:58,000
But other than that, give it a try yourself.

566
00:45:58,000 --> 00:46:02,000
See if you can do the balance after a certain number of

567
00:46:02,000 --> 00:46:04,000
periods.

568
00:46:04,000 --> 00:46:08,000
And you can even figure out how much interest and all those

569
00:46:08,000 --> 00:46:11,000
kinds of things, too, if you want to try that.

570
00:46:11,000 --> 00:46:13,000
They're all in Excel.

571
00:46:13,000 --> 00:46:19,000
Excel has so many functions that I can't remember even half of

572
00:46:19,000 --> 00:46:21,000
them, and I'm neurodivergent.

573
00:46:21,000 --> 00:46:22,000
It's just ridiculous.

574
00:46:22,000 --> 00:46:26,000
But in terms of finance, the ones you see up here that I've

575
00:46:26,000 --> 00:46:29,000
done, those are really core.

576
00:46:29,000 --> 00:46:31,000
Those are really core.

577
00:46:31,000 --> 00:46:38,000
But anyway, that's how you do Excel.

578
00:46:38,000 --> 00:46:41,000
And that's on a quiz.

579
00:46:41,000 --> 00:46:46,000
Now, I'm not saying I'll give you a quiz next Monday.

580
00:46:46,000 --> 00:46:49,000
I'm not saying that at all.

581
00:46:49,000 --> 00:46:52,000
So if I give you a quiz next Monday, which I didn't say I'm

582
00:46:52,000 --> 00:46:57,000
going to do, I would anticipate that you can do this like a

583
00:46:57,000 --> 00:46:58,000
boss.

584
00:46:58,000 --> 00:47:02,000
You can just crank these out, and you can see in that kind of

585
00:47:02,000 --> 00:47:09,000
a context the power of Excel and why it has become the atlas

586
00:47:09,000 --> 00:47:15,000
carrying on its shoulders the weight of the financial world.

587
00:47:15,000 --> 00:47:20,000
And then that will give you about two years of running room

588
00:47:20,000 --> 00:47:23,000
before you'll have to learn how to do chat GPTs.

589
00:47:23,000 --> 00:47:29,000
But anyway, for now, though, this is the main bulk of what

590
00:47:29,000 --> 00:47:31,000
you need to know.

591
00:47:31,000 --> 00:47:35,000
And that is all I have for you today.

592
00:47:35,000 --> 00:47:40,000
I thank you.