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FIN 300 Course URL – Managerial Finance 1

Moving on to the next example what is the future value of $100 invested at 6% compounded interest per year for eight years so we’re going to solve this in two different ways algebraically and how we would do it with a financial calculator so algebraically it’s pretty simple we would just use that formula that we introduced in the previous video so the present value

Is what we’re investing so it’s the hundred dollars and then the interest rate its 6% per year and it’s compounded first off this is compound interest so we know that we’re using the compound interest formula so the one with an exponent so anyways the rate is 6% and it’s for 8 years so then adding the bracket one plus point zero 6 would give us one point zero six

And then one point zero six to the power of 8 would give us one point five nine three eight five and then multiplying those out we would end up with a final future value of one hundred and fifty nine dollars and 38 cents so investing $100 at 6% compounded for eight years you would end up with one fifty nine point three eight and if they were asking you how much

Interest did you earn throughout that time period we would just take that future value of 150 nine point three eight and subtract it from the present value of a hundred so the interest that we earned was fifty nine dollars and 38 cents over that eight years now with a financial calculator the way we would solve this is you want to look for these five buttons now

I’m not going to actually go through the mechanics of how to input the numbers but i will tell you what the inputs are so on your sheet you always want to pretty much write out these five variables and then fill them in before punching them into your calculator now the first variable that n basically represents the number of periods that we’re dealing with in

The scenario so the first thing you have to know is what is one period is it half a year a quarter year is it a year and in this case because we’re dealing with interest per year and they’re asking us for eight years we can be pretty confident that the period of time we’re dealing with is years so we’re trying to find the future value of something after eight

Years so we know that our n is going to be eight the next variable this i /y basically represents the effective interest rate per period now the word effective will go into more detail in future videos so perhaps maybe just ignore that word for now and just think of this iy as the interest rate per period and we already established that the period of time we’re

Dealing with in this scenario is years so the interest rate per period is six percent so this iy here would be six now most calculators want you to put this in percentages so you would put the actual 6-year notice when we get out your break lis for the r we have to use the decimal form so it’d be point zero six but when you’re in putting it into most financial

Calculators this has to be in percentages so you would just leave it as six next variable is this pmt amount which is short firm for payment and what this represents is the cash flows that happen per period so in this case the any cash flows that happen per year and if you look at our scenario there are no cash flows happening per year there’s only a single cash

Flow that we invest in $100 and then we’re going to get back a certain amount of cash flow at the end of eight years there’s no other cash flows in between that so the cash flows per period here or the pmt amount is zero now when we get into dealing with multiple cash flow scenarios then we’ll have amounts that we have to input for pmt so for example if we invest

$100 per year for eight years then this pmt amount would be a hundred but because we’re only investing that $100 once at the beginning there are no other cash flows that are happening per period hence why it’s zero in this case moving on to the next variable the pv pretty self-explanatory it’s basically the present value and in this case it’s the hundred dollars

But what you want to be careful when you dealing with these variables the pv and the fv is positive and negatives because you’re investing $100 so you’re giving a hundred dollars that’s a cash outflow for you so that’s a negative cash flow for you so this would be negative 100 so then the future value we don’t know what that is we’re actually figuring that out so

Here you would put a question mark because that’s what we’re actually computing so what you want to do is you want to write out these five variables make sure that you have a number four four out of the five of them and then for the one you’re solving just put a question mark and then when you actually compute the future value once you’ve inputted those four other

Variables you would get one fifty nine point three eight and you’ll actually get a positive amount so what that means is that you’re getting one fifty nine point three eight because initially you invested it so it was negative one hundred and now you’re getting it back so that’s positive it should come out positive in your calculator and notice how this amount is

The same as this amount that we calculated algebraically so two different ways i again didn’t go over the mechanics of how to actually input or compute variables in the financial calculator but in future videos i will always list these out and tell you what the actual inputs are yo what’s up guys thanks for checking on my channel hopefully you got some value from

The video you just watch if you did get some value a big favor to ask you please like this video and subscribe to the channel any questions any recommendations on things you’d like to see please leave it in the comments section also check out the description box below for links to material and content related to the video you just watch peace out

Transcribed from video

FIN 300 – Finding Future Value with Financial Calculator – Ryerson University By AllThingsMathematics