Time Value of Money calculations are a great way to figure out how much payments will...

 

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Time Value of Money calculations are a great way to figure out how much payments will be on loans or how much we need to save over time to achieve our financial goals. The calculation always uses the variables: N (number of periods), I/Y (Interest rate per period), PMT (Payment Amount per period), PV (Present Value), and FV (Future Value). Given 4 variables we can calculate the 5th variable. If you want to buy a new car, you can figure out the payments (PMT) if you know the amount of the loan (PV), the interest rate (I/Y), and the number of payments you want to make (N). What about future value? Well, with a loan we want to pay that thing off, so the FV is $0. For example: I am looking at a Tesla Model S Dual Motor with a $99,380 price tag out including taxes, fees, and delivery. I want to put $10,000 down, my estimated interest rate is 4.9% and I want a loan for 6 years (72 months). Now I can figure out my payment using my financial calculator. N = 6 years x 12 months = 72 pay periods I/Y = 4.9%/12 = 0.408333% per month (use 6 decimals) PV = $99,380 - $10,000 down payment = $89,380 financed FV $0 (pay the loan off) Solve for PMT = ?? -$1,435.32 (it is negative because I'm paying it every month, that money leaves my bank account) So, my payments will be $1,435.32 per month for 6 years if I want to buy that Tesla. I can take this a step further by figuring out the total cost of the car and the total interest I'll pay on the loan. Take the payment and multiple it by the number of payments. Add the down payment to get the total cost of the car. Then, Subtract the initial price of the car to get the amount of interest paid over the loan. $1,435.32 x 72 = $103,343.04 in payments $103,343.04 + $10,000 = $113,343.04 is the total cost of the car $113,343.04 $99,380 $3,963.04 in total interest paid over the course of the loan. Discussion Question Find a car, maybe your dream car, and look it up on a dealership's website. Find the price (to make it easier, assume that it includes taxes and fees), estimate a down payment you will use, and then calculate your estimated payment for 72 months. Use 7.9% for your I/Y (don't forget to convert it to monthly by dividing by 12). Then figure out th of the car, and the total interest you'll pay over the course of the loan. Time Value of Money calculations are a great way to figure out how much payments will be on loans or how much we need to save over time to achieve our financial goals. The calculation always uses the variables: N (number of periods), I/Y (Interest rate per period), PMT (Payment Amount per period), PV (Present Value), and FV (Future Value). Given 4 variables we can calculate the 5th variable. If you want to buy a new car, you can figure out the payments (PMT) if you know the amount of the loan (PV), the interest rate (I/Y), and the number of payments you want to make (N). What about future value? Well, with a loan we want to pay that thing off, so the FV is $0. For example: I am looking at a Tesla Model S Dual Motor with a $99,380 price tag out including taxes, fees, and delivery. I want to put $10,000 down, my estimated interest rate is 4.9% and I want a loan for 6 years (72 months). Now I can figure out my payment using my financial calculator. N = 6 years x 12 months = 72 pay periods I/Y = 4.9%/12 = 0.408333% per month (use 6 decimals) PV = $99,380 - $10,000 down payment = $89,380 financed FV $0 (pay the loan off) Solve for PMT = ?? -$1,435.32 (it is negative because I'm paying it every month, that money leaves my bank account) So, my payments will be $1,435.32 per month for 6 years if I want to buy that Tesla. I can take this a step further by figuring out the total cost of the car and the total interest I'll pay on the loan. Take the payment and multiple it by the number of payments. Add the down payment to get the total cost of the car. Then, Subtract the initial price of the car to get the amount of interest paid over the loan. $1,435.32 x 72 = $103,343.04 in payments $103,343.04 + $10,000 = $113,343.04 is the total cost of the car $113,343.04 $99,380 $3,963.04 in total interest paid over the course of the loan. Discussion Question Find a car, maybe your dream car, and look it up on a dealership's website. Find the price (to make it easier, assume that it includes taxes and fees), estimate a down payment you will use, and then calculate your estimated payment for 72 months. Use 7.9% for your I/Y (don't forget to convert it to monthly by dividing by 12). Then figure out th of the car, and the total interest you'll pay over the course of the loan.

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