The investment analysis of property often requires the investment analysis of "partial instruments". That is, parties other than the freehold owner have interests in the property. For example:
* Lessee and lessors' interests
* Mortgagee and mortgagors' interests.
Because such interests have a time period less than perpetuity they cannot be valued with the present value of an annuity in perpetuity or the "capitalization method":
MV = NAI * 100/CR
Where:
MV = market value
NAI = net annual income
CR = capitalization rate as a %
The investment analysis of partial interests requires the use of the 4 basic compound formulae. Using computer and financial calculator notation:
* FV = future value
* PV = present value
* FVPMT = future value of an annuity or payment
* PVPMT = present value of an annuity or payment
ALL compound functions can be calculated knowing 3 of the following input s (based on financial calculator notation):
n = number of periods
I = interest rate as a % (i = interest rate as a decimal)
PMT = payment or annuity eg rent
FV = future value
PV = present value
In this part we will construct a useful spreadsheet which can be used to value any compound function.
STAGE 1 SET UP MAIN WINDOW
Using excel notation:
A1: FUTURE & PRESENT VALUES OF A LUMP SUM
A2: (underline)
E4: INPUTS
E5: (underline)
A8: PERIODS (n):
A10: INTEREST RATE PER PERIOD %:
A12: PRESENT VALUE (PV):
A14: FUTURE VALUE (FV):
A17:ANSWER
A19:=IF(E12=0,A12,A14)
E8: 35
E10: 8
E12:0
E14: 1000
E17: underline
E19: =IF(E12=0;(1/base)^E8*E14;(base^E8*E12))
G8: BASE
G12: IF NOT NEEDED ENTER “0”
G14: IF NOT NEEDED ENTER “0”
H8: =1+E10/100 should show 1.08
Name G8 “base:”
This shows a present value answer of $67.63. That is, the present value of $1000 in 35 years time at 8%pa = $67.63.
Enter a present value of 1000. What would it accumulate to compounding at 7%pa over 35 years?
The answer should be $14 785.34.
Save the spreadsheet as CV1.
The resultant spreadsheet should look like this:
Click on sheet 1 tab and rename “LUMP SUMS”
ANNUITIES
Retrieve file CV1.
Copy the active cells of sheet one by highlighting, copy and paste to sheet 2.
Cut cells A12:A14 and paste at A19.
Clear cells G12 and G14.
G12: ANNUITY OR PERIODIC PAYMENT:
Delete row 14
Name E8:”nn”
E10”II”
E12: “PMT1”
H8: “base”
Enter:
E18: =(1-1/base1^nn)/(II/100)*PMT1
E20:=(base1^nn-1)/(II/100)*PMT1
This will shows that an annuity or periodic payment of $1000 has a present value of $11654.57 and a future value of $172316.8.
Save file CV2.
The spreadsheet will look like this:
