CF 3-1A – Future Value – Corporate Finance

Let's take a look at problem three, one, a, the first in our series on time value of money. So we deposit some money in an account. It's going to grow for a while. We got to figure out, well, what's it going to be when we go to withdraw it a year or five years from now? You deposit $5,000 into a high yield savings account that pays 4% interest. How much money do you have after a year? Okay. With this, I don't need any fancy finance to tell me, right? I can just go, well, it's $5,000. I'm putting in, it earns 4% interest. So that's $200 is what it's going to earn this year. So if I start with 5,000, how much money do I have? I'll have $5,200. But of course you probably won't be handed a question like this on your corporate finance midterm or, you know, in any test it's, it's too, uh, uh, basic, I would say, but you know, it could ask, what's that going to grow to over five years? And it's not as simple as saying, well, it's $200 in interest every year. So five years from now, that'll be a thousand dollars in interest because after year one, we have 5,200 in the account and that 5,200 grows at 4%. This is the concept of compound interest. I'll show you how to solve this in a financial calculator in a minute. Uh, but I would never solve this one with a financial calculator. I would do it by hand and here's how you would do this by hand. You go $5,000 times one plus R being our annual interest rate in this case to the power of T. T is the number of years or the number of periods that this thing is going to compound for. So $5,000. And this might seem weird if you're, it's probably, hopefully it isn't your first time seeing it, but if it is your first time seeing it, it might feel weird. You use this little function so much in a finance class, it's going to become second nature to you, which is why I would never use the financial, uh, elements of my financial calculator, uh, to solve here just because the formula is real easy once you've used it a billion times as you will in your finance course. So 5,000 times one plus R, what's one plus R it's one plus 4%. It's 1.04 to the T five years, 1.04 to the power of five. Okay. So let's punch that in our calculator. 1.04 Y to the X that means to the power of, and it's the power of five. So 1.2166 that's what this equals 1.2166 times 5,000. So I'll just multiply this number by 5,000 and I get 6 0 8 3 0.26 6 0 8 3 0.26. Okay. So there we've answered the question we're done. And the idea is money grows when invested in an account that has interest. Pretty straightforward. I hope straightforward. Um, I don't think you should use your financial calculator. And if you're not going to use your financial calculator, stop the video here, just hit the thumbs up on your way out the door. But if you're one of those folks that wants to say, oh, I'd like to know how to use my financial calculator. This isn't a great question for it, but you know, just practice. So here's what I use the BA two plus financial calculator in classes and in videos. Uh, if you're using some Casio or some other brand, you know, it'll be similar. So let's figure out what we're going to input here. The number of periods for this was, I think it was five, the interest rate per period or discount rate per period was 4%. Uh, present value is the value of the money today. I'm going to invest. I put this in as a negative number. I'm putting in $5,000 out today. There's no recurring payments. Uh, the future value, we don't know in the payments at the beginning. No. So we don't worry about the beginning function. No. Okay. So let's input all of this into our calculator. What does that look like? Uh, I always go second function, clear TVM in case there was some information in there. So second function gets you above and then clear TVM. And then I go second function, clear work. And then I hit the CC button five times just for good luck. I don't know why I do that, but I always do that, uh, just to make sure there's no numbers lurking in memory somewhere. So I hit five and I hit four. I, why that's kind of a weird thing here. You put the interest rate. You don't put 0.04. You put four as in 4%, even though in a calculator you would put, or we were calculating numbers. You'd put 0.05, 5,000 negative is my PV zero is my payment. I don't need to put it like if it's zero, you just don't do anything. I don't need it for the begin. So then I say, okay, please compute. So I hit the CPT button and then F where are you? There you are. So compute FV, I get 6 0 8 3 0.26. Same answer as I got up here. I wouldn't do this in a financial calculator. I would do this one by hand. There's plenty that we will do in our financial calculator at this chapter. Anyway, there you go. We've solved three one eight. Now I know the people that left earlier gave me a big thumbs up. I hope you give me an extra big thumbs up for sticking around till the end. Thanks for watching. See you in the next video. Bye.