All Hail the Powers of Compounding!!!!
Among the functions you will use in your life, the Six Functions of a Dollar will hit the charts in the top ten. Here are materials I have developed to help you learn their significance and proper implementation.
Six Functions of a Dollar Presentation: This Powerpoint presents key elements of the Six Functions of a Dollar.
Most Common Uses of Six Functions of a Dollar: This page summarizes common applications for each of the six functions, and shows the formula for each function.
Three Excel formulas are required to perform the six function calculations.
The Present Value (PV) formula can calculate the present value of a constant annuity (recurring payments of the same amount), or the present value of a future lump sum payment. It may also be used when both a lump sum in the future and a recurring constant payment combine to create an income stream (e.g. a standard bond).
The Future Value (FV) formula calculates the future value of a constant annuity, and the future value of a lump sum today grown at a rate into the future.
The Payment (PMT) formula caluclates the amortization of a present value (e.g. loan) or future value (e.g. savings goal). While the word can be intimidating, amortization simply means the amount of a payment. When using this formula, remember the payment calculation remains the same over the entire period.
Using Excel Function Library to Perform Six Functions Calculations: This page summarizes the inputs and output for the PV, FV and PMT formulas in Excel.
Once we've mastered the basics, we'll Kick It Up A Notch!!!
Here I teach you three additional formulas that will prove valuable in managing your financial futures, personally for all and professionally for many. Three other formulas are incorporated into our curriculum, RATE, NPER, NPV, and IRR. Each of these formulas has investment valuation applications.
The RATE formula is actually the same formula as PV except the rate of return is treated as an output rather than as one of the inputs. Present value, future value or both are treated as an input.
The NPER formula is actually the same formula as PV except the number of periods is treated as an output rather than as one of the inputs. Present value, future value or both are treated as an input.
The Net Present Value (NPV) formula allows one to calculate the present value of an income stream that changes in amount over time. Remember the Present Value of an Annuity discussed in earlier lessons involved a constant payment that did not change from period to period.
Like the relationship of PV and RATE, the Internal Rate of Return (IRR) formula is the same as NPV except the rate of return is treated as an output rather than as one of the inputs. Present value is treated as an input.