Finance Calculator

Finance Calculator

This finance calculator calculates the future value (FV), monthly payment (PMT), interest rate (I/Y), number of compounding periods (N), and present value (PV). Each of the tabs below represents the parameters to be calculated. It functions similarly to the 5-key time value of money calculators as the BA II Plus or HP 12CP.

In fundamental finance classes, a significant amount of time is spent calculating the time worth of money, which might entail four or five separate factors, including Present worth (PV), Future Value (FV), Interest Rate (I/Y), and Number of Periods. Periodic payment (PMT) is an optional element.

The Time Value of Money (TVM)

Suppose someone owes you $500. Would you rather have this money reimbursed immediately in one payment or spread out over a year in four monthly payments? How would you feel if you had to wait for the complete money rather than receiving it all at once? Did the payment delay cost you something?

According to a notion known as the "time value of money," you will most likely desire all of the money right soon because it can be used for a variety of purposes, including spending on an extravagant fantasy vacation, investing to generate interest, or paying off all or part of a loan. The "time value of money" principle states that a dollar in hand today is more valuable than a dollar promised later.

This is the foundation of the concept of interest payments; for example, when money is deposited in a savings account, modest dividends are earned for leaving the money with the bank; the financial institution pays a small fee to have that money on hand. This is also why the bank will pay more to retain the money and commit to it for a set amount of time.

Future value in finance refers to the enhanced value of money at the end of a term of interest collection. Here's how it works.

Assume $100 (PV) is invested in a savings account that earns 10% interest (I/Y) annually. How much will there be in one year? The amount is $110 (FV). This $110 represents the original principal of $100 plus $10 in interest. $110 is the future value of $100 invested for one year at 10%, which means that $100 today is worth $110 in one year if the interest rate is 10%.

Generally, investing for one term at an interest rate of r will yield a return of (1 + r) on each dollar invested. In our case, r is 10%, and the investment grows to:

1 + 0.10 = 1.10

$1.10 per dollar invested. Because $100 was invested in this scenario, the result, or fair value, is:

$100 × 1.10 = $110

The original $100 investment is now worth $110. However, if the money is left in the savings account for another two years, what will the ensuing FV be, assuming the interest rate remains constant?

$110 × 0.10 = $11

After the second year, $11 of interest will be earned, bringing the total to:

$110 + $11 = $121

$100 has a projected value of $121 after two years at a 10% rate.

Also, in finance, the PV is what the FV will be worth given a discount rate, which has the same meaning as an interest rate but is applied inversely over time. In this example, the PV of a $121 FV with a 10% discount rate after two compounding periods (N) is $100.

The money structure of this $121 FV is divided into several parts:

The first part is the first $100 of the original principal, or its Present Value (PV).

The second half is the $10 in interest generated over the first year.

The third element is the remaining $10 in interest earned in the second year.

The fourth component is $1, which represents interest collected in the second year on interest paid in the first year: ($10 × 0.10 = $1)

PMT, or periodic payment, refers to the inflow or outflow of funds at regular intervals. Consider a rental property that generates $1,000 in monthly rental income, resulting in recurring cash flows. Investors may wonder how much $1,000 in cash flow each month over ten years is worth. Otherwise, they have no clear evidence to justify investing much in a rental property. For example, how would you evaluate a business that makes $100 per year? What about paying a $30,000 down payment and a $1,000 monthly mortgage? The payment formula for these queries is fairly complex, so we recommend using our Finance Calculator, which can help analyze all these circumstances using the PMT function. Don't forget to select the right option for whether payments are made at the start or end of compounding periods; this choice significantly impacts the total amount of interest incurred.

Finance Class

It is quite difficult for business students to traverse finance classes without using a useful financial calculator. While most fundamental financial calculations may be done by hand, teachers usually allow students to use financial calculators, including during exams. It is not vital to be able to make calculations by hand; rather, it is to comprehend financial principles and how to apply them utilizing these handy calculating instruments that have been invented. Our web-based financial calculator is a useful tool for lectures or homework, and because it is web-based, it is always accessible as long as a smartphone is nearby. Adding a graph and a schedule, absent from physical calculators, can be more visually beneficial for learning.

Importance of Finance Calculator

In essence, our Finance Calculator serves as the foundation for most of our other financial calculators. It is helpful to consider it an analogy to the steam engine, which was eventually utilized to power many objects, including steamboats, railway trains, industries, and automobiles. There can be no Mortgage Calculator, Credit Card Calculator, or Auto Loan Calculator without understanding the time worth of money, as illustrated by the Finance Calculator. In truth, our Investment Calculator is a rebranded Finance Calculator, with everything else remaining essentially the same.