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):

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.

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:

4