Add Project Compute Rates Show Cash Flow Graph Cash Flow Time-Value-of-Money Factors Compare Projects Compare Multiple IRR/RIC Taxes Inflation Taxes/Inflation Uncertainty Functions User-Defined Cash Flows Factors F/P P/F A/F F/A A/P P/A P/G A/G P/Geo

 Investment Economics -Time-Value-of-Money Factors
 User-Defined The add-in installs a number of user defined functions that compute time value of money factors. Investments usually involve cash flows that occur at different times. For example the investment in a bond requires an outflow of money for the purchase of the bond at one time, usually called time 0, inflows of money in the form of periodic interest payments and an inflow at some later time that is the redemption value of the bond. The cash flows associated with the investment occur at different points in time. To measure the acceptability of the investment or to compare it against alternative uses of capital, we may want to compute the equivalent value of the cash flow at time 0 or at some specified future time. We compute equivalent values using time-value-of-money factors. Although Excel has a variety of native functions to perform these calculations, they typically do not use the language of investment analysis texts and they do not include all the familiar factors. The add-in provides the most familiar functions in the form of user defined functions. One way, among many others, to place a function in a cell is to select the cell and choose insert function from the Excel Insert menu. The dialog box below appears. The User Defined category is at the button of the list. When that category is selected, the set of user-defined functions currently available appears at the right. The list shown below includes some of the functions provided by the Economics add-in. We prefix most of the functions with E_ to distinguish them from others that may be resident. Just below the list, we see the function currently selected. The particular one illustrated is the A/F factor. This computes the future value of a uniform series. The notation shows the number of arguments, 2 in this case, but not their identity. There are no Help files available for these functions. You can learn about them and their arguments in the following discussion.

Cash Flows

The figures below show the five kinds of cash flow components that are manipulated by the time-value-of-money factors. Each factor takes a value expressed in one of the cash flows and changes into an equivalent for another. It is important to notice the timing of the payments because the factors are derived particularly for this timing. The cash flows involving more than one payment occur at the end of periods. Thus the payment for period t occurs at time t + 1.
 Fig. 1. A single cash flow at time t Fig. 2. A single cash flow at time t+n Fig. 3. A uniform series of n payments, starting at time t and ending at time t+n Fig. 4. An arithmetic gradient of payments with the first at time t+2 and the last at time t+n Fig. 5. A geometric gradient with the first payment at time t+1 and subsequent payments increasing by the factor (1 + g), where g is a positive quantity normally less than 1.

Factors

The following sections describe each factor by its traditional notation and name. The second row, shows the Excel function name and the arguments of the function. The third line provides an example to illustrate its use. The answer to the example is provided in an image from an Excel worksheet. The image shows the function calculation using the traditional notation followed by the calculation via the user-defined functions.The yellow areas show the formulas using the user-defined functions. Arguments are entered as references to worksheet cells, however, they could have been entered directly as numbers. Using pointers to cells is preferred because the parameters of the problem are clearly documented on the worksheet.