Workshop 2, Week 3

TVM and Financial Statements!

Time Value of Money (TVM) - 4 Types of Calculation !!1) Finding the Future Value (FV) of an investment today (single sum) at an interest rate (r) of i% for n compounding periods (Refer to Appendix 5 - FV table)!!! ! ! ! FV = PV * (1+ r)^n!! !Compounding Interest - reinvesting the interests earned from previous periods and calculate interest amount for the next period based on the total value of investment (original principal + interest received from previous periods) !!E.g. $1000 investment, 10% interest rate, compounded annually.!!With compounding, i.e. earning interest on interest (using the formula FV = PV * (1+ r)^n )!!Total value @ end of year 1 = $1000 * (1+10%) = $1100!Total value @ end of year 2 = $1000 * (1+10%)*(1+10%) = $1100 * (1+10%) = $1210! !! ! ! :!! ! ! :!Total value @ end of year 10 = $1000 * (1+10%)^10 = $2594!!OR> Find the future value factor (1+r)^n in Appendix 5, in this case, r=10%, n=10.!!!!!2) Finding the Present Value (PV) of an investment payoff (single sum) due to be received in n periods time at an interest rate (r) of i% (Refer to Appendix 7 - PV table)!!! ! ! ! PV = FV * 1 / (1+r)^n!!This is the reverse of compounding i.e., Discounting. !!E.g. A $1000 investment payoff in 10 years time would worth less than $1000 as at today.!Assuming the interest rate is 10% compounded annually,!!! ! ! PV = $1000 / (1+10%)^10 = $386!!OR > Find the present value factor 1/(1+r)^n in Appendix 7, in this case, r=10%, n=10.!!!

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Workshop 2, Week 33) Finding the FV of an annuity ($) at an interest rate (r) of i% for n compounding periods (Refer to Appendix 6 - FV annuity table)!!

! ! !!! ! ! FV = Annuity Amount * FVA Factor!!E.g. How much would you accumulate if you invest $1000 every year for the next 10 years at a compounding interest rate of 10%?!!Annuity Amount = $1000, n=10, r = 10%!!Using FV annuity table in Appendix 6, we get the FVA Factor = 15.937!!Therefore, using the formula, we can calculate the FV in 10 years time!!! ! ! FV = $1000 * 15.937 = $15937!!!4) Finding the PV of an annuity ($) at an interest rate (r) of i% for n compounding periods (Refer to Appendix 8 - PV annuity table)!!

! ! ! !!We have to discount back the annuity amount at each period.!!! ! ! PV = Annuity Amount * PVA Factor!!E.g. An investment appraisal costing $6000 today promises an annual payment of $1000 for the next 10 years, assuming the interest rate is 10%, should you invest?!!Using PV annuity table in Appendix 8, we can find the PVA Factor = 6.145!!Using the formula, we can find the PV of the annuity payments!!! ! ! PV = $1000 * 6.145 = $6145 > $6000, therefore should invest!!

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Workshop 2, Week 3

Financial Statements 1) Balance Sheet (Statement of Financial Position)! - reflects your financial position at one point in time (what you own and what you owe)!- Assets = Liabilities + Net Worth! !

Balance Sheet!for (Your Name)!

As at 20 March 2015 (Date)!

!Ratio Analysis!!Solvency = you have enough assets to repay your liabilities as they fall due!!A. Solvency Ratio = Total Net Worth / Total Assets!!You are afford to have a % decline in assets before you become insolvent.!!!B. Liquidity Ratio = Current Assets / Current Liabilities!!Your ability to meet short term obligation is .!!

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Workshop 2, Week 32) Income Statement (Statement of Financial Performance)!!

Income Statement!for (Your Name)!

For the period ending 20 March 2015(Date)!

Ratio Analysis!

A. Savings Ratio (APS) = Income not spent / Total Income!

!B. Debt Service Ratio = Loan Payment / Total Income!

!Budgeting The Budget Sheet - Appendix 4!Estimates of income and expenses should be based on experiences from the past.

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