|Re: TVM inaccuracy|
Message #8 Posted by tony on 14 Aug 2003, 6:21 a.m.,
in response to message #7 by Victor Koechli
>Hmmm... Forgive my ignorance, but I'm trying to find out why this makes a difference.
Oh, I just gave the mathematical side. My reading was you wanted to know why there was a small difference.
The TVM expression I gave assumes monthly compounding.
TVM always compounds at each payment incident.
> Is it because, in this example, interest is only compounded once a year, while payments are received monthly?
The exact 224.95 answer assumes the payments get simple interest. If the plan lasts for one year only then there is really no compounding at all.
>And if so, could you still calculate this example using the TVM solver?
No, TVM will not do this. But what it will do is ... if the savings plan lasts for a number of years, and the compounding occurs one a year, then you can compute an FV by using the equivalent end-of-year payment, as PMT. This would be
121.95 in this case. So you can correctly compute the FV after 10 years with n=10 i=3 PV=100 PMT=121.95 at END.
This also works with n=1, of course, but we have had to calculate the PMT manually... this is as close as we can get to representing this problem in TVM.
Hope this ramble helps :)