How to use internal break-even time
In his presentation we will take a look at a future value calculation with the periods in terms of months
rather than years
We're gonna have the information up top going into that into the blue area down below
We can do this three ways we can do it with a formula we can use the tables or we can use excel in any
of these three ways however we need to be mindful that the fact that we're talking about months in terms
of the periods rather than years when we think about months rather than years the rate will typically
still be given in terms of years and we're going to have to coincide then the rate to the months that
common way to do that is to adjust the rate from a yearly rate to a monthly rate
So just remember when you hear a rate it means per year most of the time unless said otherwise
And therefore we if we have to apply this to something other than years we're gonna have to adjust that
rate
And so in this case of course if it's twelve percent per year it would be twelve divided by twelve or
one percent per month
If you're working with a problem that uses tables they will probably stay away from this kind of problem
because we have to have somewhat of an even rate in order to work the tables in Excel
However this is not a problem in practice we may well have a case where we have interest rates for a
monthly type of basis as well
So just keep that in mind you have to use the same kind of information but you gotta line these two
things up so we're gonna say from the table we'll say the amount is going to be ten thousand and then
we'll say from the table we want the rate of 1 percent rather than 12 percent and then the periods represent
five months rather than five years and then we just pick up our number which will be 1 point 0 5 1 0
We can multiply that out the 10000 times that amount and that will give us our future value
Now we could do the same thing with the formulas in Excel so if we go to excel we go to the formulas
and we go to the insert function one way we could do it
We're looking for the Peavey
So we want to
I mean the f v the future value we'll select the future value will enter our dataThe key point here is the rate is going to be that 12 percent that will usually be given but that's
per year
And then we need to divide it by twelve
That's going to be the key component then the number of periods will be five
We know that it's five months not by the fact that it's distinguished within the periods here but because
that coincides with the rate that we have which is a monthly rate and then the number of payments is
going to be zero because this is not an annuity
And then the present value is going to be the ten thousandAnd OK so there we have it
If we double click on it I'm going to put as a negative before the F and then I'll flip it to a positive
number if we wanted to type it in Excel it would look something like this equals negative to flip the
side future value brackets then we'd have the rate as given here the rate up top is the B for 12 percent
and divide it by 12 key component divided it by twelve comma then we have the number of periods which
of course is five
Those represent months now and then we have that payment is zero and we have the present value which
is going to be the 10000 and enter
rather than years
We're gonna have the information up top going into that into the blue area down below
We can do this three ways we can do it with a formula we can use the tables or we can use excel in any
of these three ways however we need to be mindful that the fact that we're talking about months in terms
of the periods rather than years when we think about months rather than years the rate will typically
still be given in terms of years and we're going to have to coincide then the rate to the months that
common way to do that is to adjust the rate from a yearly rate to a monthly rate
So just remember when you hear a rate it means per year most of the time unless said otherwise
And therefore we if we have to apply this to something other than years we're gonna have to adjust that
rate
And so in this case of course if it's twelve percent per year it would be twelve divided by twelve or
one percent per month
If you're working with a problem that uses tables they will probably stay away from this kind of problem
because we have to have somewhat of an even rate in order to work the tables in Excel
However this is not a problem in practice we may well have a case where we have interest rates for a
monthly type of basis as well
So just keep that in mind you have to use the same kind of information but you gotta line these two
things up so we're gonna say from the table we'll say the amount is going to be ten thousand and then
we'll say from the table we want the rate of 1 percent rather than 12 percent and then the periods represent
five months rather than five years and then we just pick up our number which will be 1 point 0 5 1 0
We can multiply that out the 10000 times that amount and that will give us our future value
Now we could do the same thing with the formulas in Excel so if we go to excel we go to the formulas
and we go to the insert function one way we could do it
We're looking for the Peavey
So we want to
I mean the f v the future value we'll select the future value will enter our dataThe key point here is the rate is going to be that 12 percent that will usually be given but that's
per year
And then we need to divide it by twelve
That's going to be the key component then the number of periods will be five
We know that it's five months not by the fact that it's distinguished within the periods here but because
that coincides with the rate that we have which is a monthly rate and then the number of payments is
going to be zero because this is not an annuity
And then the present value is going to be the ten thousandAnd OK so there we have it
If we double click on it I'm going to put as a negative before the F and then I'll flip it to a positive
number if we wanted to type it in Excel it would look something like this equals negative to flip the
side future value brackets then we'd have the rate as given here the rate up top is the B for 12 percent
and divide it by 12 key component divided it by twelve comma then we have the number of periods which
of course is five
Those represent months now and then we have that payment is zero and we have the present value which
is going to be the 10000 and enter
No comments