Using a Timeline to Solve Time Value of Money Problems

When solving a time value of money problem, it is sometimes easy to draw a timeline to present the cash flows on it. Once we have the timeline, we can easily understand the variables and visualize the present value or future value calculations.

In the previous pages, we demonstrated the time line for an ordinary annuity and for uneven cash flows.

Let’s take one more example to demonstrate the use of a time line.

Example: Loan Payments

You have taken a loan of $10,000 at an annual interest rate of 12% for a period of 2 years. Calculate the monthly payments you will make on this loan.

The payments (PMT) or Equated Monthly Instalments will be paid monthly for the next 24 months.

The above problem can be demonstrated on a timeline as follows:

Calculator Usage

To calculate the monthly payment:

Set compounding frequency to 12 (P/Y)

PV = 10,000

I/Y = 12

N = 24

PMT = 470.735

Create Your Free Account

Create a free account to access this content and join our community of learners.

You'll get access to:

Access the full tutorial
Join our learning community
Track your progress
Bookmark content for later

Using a Timeline to Solve Time Value of Money Problems

Create Your Free Account

You'll get access to:

Annuities with Different Compounding Frequencies

Topics

Related Groups

Course Downloads

The Time Value of Money