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Your Financial Partner Version 2.12 6/12/86 Your Financial Partner Distribution Version 2.12 June 12, 1986 (c) 1986, Marc R. Feldesman All Rights Reserved Your Financial Partner grew out of frustration with the complexity and expense of many financial management programs on the market today. There is nothing in this program that programs like Lotus 1-2-3, Symphony, Framework, and SuperCalc 3 can't compute; however, Your Financial Partner combines all the common financial functions into an easy-to-use format. My idea was to produce a simple, menu-driven program, that would provide the types of financial computations most people need. The program is largely self-explanatory; this documentation supplements the program. Hardware Requirements: The program requires an IBM-PC, XT, or AT compatible computer with MS-DOS 2.0 or above, a minimum of 128K of RAM, and one floppy disk drive. A printer is optional; however, if you want hard-copy of loan amortization schedules, you will need a printer. The program makes no special demands on the printer; any 80 column text printer will do. Operation: To operate the program, boot your computer with DOS. Place the diskette containing Your Financial Partner either in the A: or B: drive, or copy the files onto your harddisk. To run the program you merely type FPDxx where xx is the version number. The program opens no files and does not write to any diskette. If you find a version that causes your disk drive light to come on at any time, you have a bogus-copy. For convenience, you may wish to rename the file as FINPART.COM. General Information: Your Financial Partner performs 7 different types of financial calculations. The main menu displays all these 1 Your Financial Partner Version 2.12 6/12/86 different functions. To move from choice to choice on the menu, use the up and down arrow keys. When you are positioned at your menu selection, hit the return key. Alternately, you may press the number corresponding to your choice; this will immediately transfer the control to a related sub-menu with the associated options. If, at any point in the program, you wish to return to the menu, the ESC key is your path back. Hitting the ESC key twice will bring you back to the Main Menu. Every function requires user input. In writing the program I made every effort to protect you from yourself: you cannot enter an implausible or illegal value. There are two levels of error trapping. First, all input must be numeric. Therefore, the moment you enter any non-numeric character, the computer will beep and erase your entire entry. The only non-numeric characters allowed are '.' and '-' (but only as the first character in a data field, and only if negative numbers are allowed). Second, each input field is constrained by numerical limits. Thus, for example, you cannot enter an interest rate smaller than 1% nor larger than 50%. Two factors govern these latter limits: (a) limitations of numeric representation in the 8088/8086/80286 and (b) the implausibility of certain combinations (e.g. 200 year annuity with 3000 payment periods per year). The program will not permit you to go to the next cell until you provide an acceptable entry in the current cell. (Note: the program uses bank years (360 days) for most calculations involving "daily" compounding. This was a small, but insignificant compromise, needed to make life simpler for everyone). At the end of every routine you will be asked if you wish to repeat the calculation with different values. This will allow you to reuse values you've already entered. You'll be able change only those values you want changed without having to completely reenter all data. To accept a value as the default, hit the Carriage Return; to change a value hit the space bar to erase what is there. You can then enter any new value you want. You must quit the program through the main menu. If you exit from the program abnormally, it is possible that the flashing cursor will disappear from view. If this should happen, rerun the program again and quit normally; the cursor will reappear. 2 Your Financial Partner Version 2.12 6/12/86 Main Menu Aside from the "Quit" function, the main menu displays 7 functional choices. These are: (1) Future Value of an Investment (2) Minimum Savings for Future Value (3) Withdrawal from an Investment (4) Present Value of an Investment (5) Loan Calculations (6) Financial Utilities (7) Net Present Value/Internal Rate of Return (1) Future Value of an Investment This function addresses the following question: If I invest a certain amount of money regularly in an account paying a specific interest rate, compounded at regular intervals, how much money will I accumulate by time T? To answer this question, we need to know (a) whether you want to make regular deposits or whether you want to deposit Grandma's estate all at one time; (b) how much money you want to deposit (regularly or as a lump sum);(c) if the deposits are regular, what is the frequency of deposit; (d) the nominal (quoted) interest rate as a percent (e.g. enter 12% as 12, not 0.12); (e) the length of time (in years) you want to leave your money in; (f) how frequently the bank or other institution compounds interest. From this information, the program will give you a specific dollar amount representing the accumulated principal and interest over the life of the investment. (2) Minimum Savings for a Future Value. Suppose that you have a 6 year old child who you want to send to college at age 18. You haven't started to save yet, but you figure that four years of college will cost about $40,000 twelve years from now. Your question is: How much per month (or other period) will I have to put away on a regular basis (or now as a lump sum) to accumulate $40,000 by the time my child is ready for college. You have two choices in how you accumulate this money. Either you can deposit a lump sum now and let it accumulate interest, or you can make regular deposits from now until your child is ready to go to college. You can choose one of these two options from the sub-menu. Once chosen, the inputs 3 Your Financial Partner Version 2.12 6/12/86 are similar. You need to provide the following information: (a) the Future Value (i.e., how much money do you want to have by time T); (b) the rate of interest you expect to earn while the money is accumulating; (c) frequency of deposits (regular payment option) or frequency of compounding (lump sum option); (d) the number of years needed to accumulate the money. From these inputs, the program will tell you one of two answers: (a) how much money per period you will need to save to accumulate the Future Value by time T, or (b) the lump sum deposit needed now to achieve the Future Value by time T. (3) Withdrawal from an Investment Consider the following problem. Suppose you are planning to retire 20 years from now. You get a pay raise that, lo and behold, you don't need for living expenses so you decide to invest it. Your question is: If I invest this money on a regular (or lump sum) basis from now until I retire, how much will I be able to withdraw on a regular basis starting when I retire before I run out of money, or before my investment reaches a certain minimum balance. Alternatively, you might want to know how much you would have to put away to be able to withdraw a specified amount periodically at some point in the future. There are three choices for this option. The first enables you determine how much you would be able to withdraw if you made regular deposits from now until some point in the future. The second would allow you to determine regular withdrawals from a lump sum deposit made now, and the third option permits you to choose the amount you want to be able to withdraw and determine the amount you would have to save (lump sum or regularly) to accumulate the necessary funds for those withdrawals. The inputs are again relatively straightforward. The first two menu choices need the following information: (a) amount of periodic or lump sum deposit; (b) interest rate you expect to earn on the deposits; (c) how long you plan to make regular deposits; (d) total time from now until the time you begin to make regular withdrawals (e.g., if you plan to save for 10 years and retire 10 years later, then the program expects you to answer (c) with 10 and (d) with 20), and (e) for how long you plan to make regular withdrawals. This information will enable the program to tell you the Future Value of your savings, and how much you'd be able to withdraw monthly for the time period you specify. 4 Your Financial Partner Version 2.12 6/12/86 The third menu choice requires that you specify the amount you want to withdraw on a periodic basis. It also requires that you specify the length of time over which these withdrawals will take place. The program does not compute perpetuities (i.e. Social Security or a typical pension plan where withdrawals take place over an indefinite period of time, perhaps this will be an option in the future). It also needs to know the interest rate earned on the money while it is being withdrawn. These inputs will generate the amount of money needed at the beginning of the withdrawal period to accomplish the periodic withdrawal you desire. The program then asks you a series of other questions designed to provide information concerning the best savings approach to accumulating the needed cash. This part of the program requires you to specify (a) the length of time you have to accumulate the cash, and (b) the interest rate you'll be earning while the cash accumulates. This will then tell you how much you'd need to save monthly to accumulate the cash, or how much you'd have to deposit all at one time to accrue the cash. (4) Present Value of An Investment Suppose that you win the Oregon Lottery. You have a choice of receiving $200,000 per year for 20 years, or a check now for $1,000,000. Which is the better deal? This function allows you to determine the Present Value of an Investment that pays a specified amount in the future, either as a lump sum or as an annuity. To answer this pressing question we need to provide the following information: (a) Future Value of a Lump Sum payout, or the amount you will receive each period in the future, (b) the nominal interest that could be earned on money invested now; (c) the frequency that interest is compounded, the frequency payments are received; (d) the holding period (i.e. the length of time until you receive the money described above. These inputs will yield the present value of your investment. This program will tell you how much your investment is worth in today's dollars if those dollars were to earn a fixed rate of return of some n number of years. By the way, you'd be wise to take the $200,000 per year. Assuming an interest rate of 10%, the present value of our $200,000 per year for 20 years is $1,702,712.74. To better that, you would have to have a lump sum settlement now exceeding $1.7 million. 5 Your Financial Partner Version 2.12 6/12/86 (5) Loan Calculations This is, by far, the most extensive part of the program. Your Financial Partner offers you six different options involving loan calculations. These options allow you (1) to compute the monthly payment on a specific loan; (2) to compare monthly payments for a given principal at different interest rates; (3) to determine the amount of money you can borrow for a specific principal and interest payment; (4) compute a complete loan amortization schedule; (5) determine the present balance on an existing loan; and finally (6) to determine the impact of accelerating the amortization of a loan by increasing the principal payments or by making a lump sum payment at some point during the loan. Options (1) and (2) require the following information: (a) the amount of the loan; (b) duration of the loan; and (c) number of loan payments per year. Option (1) requires that you also provide the nominal interest rate. From this the program will provide you with the required payment to fully amortize the loan in the length of time specified. Option (2) asks that you estimate an interest rate. You will then be given the payments for that loan amount at a range interest rates that surround the given rate by 2% in increments of 0.25%. You may print this to the Screen or to your Printer. The third option requires you to give (a) the desired monthly payment; (b) the duration of the loan; (c) the number of loan payments per year; and (d) a good guess at a reasonable interest rate for the loan. This information will yield loan amounts having your desired payment spanning an interest range from 2% below your interest estimate to 2% above increments of 0.25%. You may also print this to the Screen or to your Printer. Option (4) is self explanatory. It produces the full amortization schedule for any loan. To produce this schedule, the program needs to know (a) the amount of the loan; (b) the interest rate; (c) the duration of the loan; (d) the number of payments per year; and (e) the starting month and year of the loan. This information generate a complete period-by-period accounting of the loan, apportioning the payment to principal and interest. This schedule can be printed, or listed to the screen. The fifth option allows you to determine the current balance on a loan. You must supply the same information required for option (4), but you also must supply the date that you made your 6 Your Financial Partner Version 2.12 6/12/86 last payment. Here the program will be quite vigilant to check that your last payment actually is within the loan period. It will reject any date not included in the loan range. Once the program accepts the date of last payment, it can determine your outstanding balance. Please be advised that the actual balance of the loan and the computed balance are likely to differ. Banks compute interest on a daily basis, while amortization schedules assume that you make payments at exactly equal intervals. The instant that you deviate from a specific interval the bank gets either more or less money from you. Nevertheless, the balance reported here should be reasonably close to the balance your bank claims you owe. The last option allows you to examine the impact of accelerating the payoff of your loan. Suppose you have a 30 year mortgage for $50,000 at 10% interest. In year 7, your grandmother dies leaving you $10,000. If you apply the entire $10,000 to your mortgage principal, how would that shorten the time required to pay it off? Alternately, suppose you get a $100 per month raise. You decide to dedicate the entire $100 to principal reduction on your mortgage. How does this affect the life span of the loan? Before we can examine the impact of any principal reduction scheme, we need to determine your current balance on the loan. Here we are doing nothing more than obtaining the same information that we needed for Option (5). Once we have your loan balance, we need only know the amount you want to add to your monthly payments to reduce the principal or the amount of single deposit applied against the principal. From here the program will report (a) when the loan will be paid off; (b) by how many periods the loan will be shortened; and (c) how much interest savings you will realize. If you apply Grandma's estate of $10,000 to your loan balance on the 86th payment, you would, on a 30 year, $50,000 loan at 10%, reduce the number of payments by 126 and save $45,574.93 in interest costs. If you apply your $100 per month raise to principal reduction on the same loan at payment 86, you would reduce the payments by 116 and save $35,351.27 in interest. (6) Financial Utilities There are two options here. The first allows you to determine the effective interest rate on a loan or investment; the second allows you to generate a monthly calendar for any month and any year beginning with 1800 and running to 2499. The only purpose of the first option is to enable you to 7 Your Financial Partner Version 2.12 6/12/86 figure out the annual percentage rate from the nominal interest rate. Most banks will tell you that they pay, say 8%, on passbook savings. If each of four banks pay 8% on passbook savings, but one compounds interest daily, one monthly, one quarterly, and one semi-annually, which bank gives you the best return on your money? Obviously, the more frequently banks compound money, the faster your money will grow. This option allows you to determine what the actual interest rate is. You need only supply two pieces of information: (a) nominal interest rate and (b) frequency of compounding. The second option is largely self-explanatory. You need to supply a month (a number between 1 and 12) and a year (a four- digit number from 1800 to 2499). The program will instantly produce a calendar. (7) Net Present Value/Internal Rate of Return These computations usually are reserved for businesses rather than individuals; however, with real estate investment such a common income-producing strategy for individuals, these options will allow you (a) to determine whether an investment actually returns a sufficient cash flow, when adjusted for the time value of money, to met your stated profit objectives or (b) to determine, given a specific set of cash flows, the rate of return those cash flows represent. To compute Net Present Value, we need the following inputs: (a) the initial investment (usually the purchase price); (b) expected rate of return; (c) number of years you plan to hold the investment or the number of years over which you want the NPV to be computed; (d) the cash flows you expect to receive each year for the duration of the investment. These cash flows are "mini- future" values that you are going to receive. To compute NPV, the program has to translate them back (discount them) to present value in order for you to accurately assess your investment. Once you've entered all the cash flows, the program will determine the Net Present Value. A positive NPV means that the investment is worth more than what you require on the basis of your profit objective; hence, it is a good investment. A negative NPV means that the investment does not meet your profit objective. An NPV of 0 means that the investment exactly meets your profit objective. The Internal Rate of Return, is simply the yield, or the discounted rate of return on an investment. To determine the IRR we need to know (a) the amount of the initial investment; (b) the number of years you plan to hold the investment; (c) the cash flows you expect to receive. From this information, the program 8 Your Financial Partner Version 2.12 6/12/86 will determine the precise interest rate necessary to make the NPV=0. You should be aware that the mathematical solution for IRR involves finding the root of a polynomial. A polynomial that has more than one sign change has more than one real root. Obviously, if there is more than one interest rate that will make NPV=0, the IRR will be meaningless. Thus, Your Financial Partner is designed to count the sign changes and reject any series of cash flows that violates the rules (in this case, Descartes' Rule of Signs). For example, the program will reject the following series of cash flows: -600, 800,900,-1000,5000. Note that the signs go: -++-+. Here there are three sign changes and the program will not compute the IRR. If you try this with any of the popular spreadsheets, they report an IRR even though the IRR is meaningless. Penultimate Notes I sincerely hope that Your Financial Partner is useful to you. I spent a great deal of time trying to write a program that I could use. I've tested all functions with a wide variety of data from financial analysis textbook problems. I'm convinced that the program is very bug-free. But, you and I know quite well that the axiom of any programmer is TAAB (There's always another bug). If you run into any problems, encounter any results that do not look right or that you know are not right, please drop me a note and explain the circumstances. I do not want a "buggy" program circulating. Ultimate Notes If you are using this program and find it to be valuable, I would be grateful for any contribution you might make ($20 suggested). I will automatically send contributors any major upgrades of the program for a six-month period. I am planning several more features, as time permits, including a full-screen editor and a pop-up four-function calculator. I am also planning cut and paste functions so that values computed in one module can be used in another module. If you downloaded this program from a Bulletin Board System (BBS) somewhere, please let me know. If you contribute for the program, I will rebate 10% of your contribution to the BBS System Operator as my thanks for his help in distributing the program. This will enable him to locate other programs for you, help pay his phone bill, help him buy a new hard disk, or help put food on his table. 9 Your Financial Partner Version 2.12 6/12/86 My legal advisors tell me that I cannot warrant this program, expressly or by implication. So, I am not responsible if this program ruins your life. On the other hand, if it makes you a millionaire, I'd like to know. Acknowledgements: I'd like to thank Phil Smith, Don Flinn, John Rau, Norm Worthington, Carol Feldesman, and the guys at Aabacus Computers for testing the program and putting up with my innumerable "just one more change". I'd also like to thank George Smith for his wonderful set of Turbo routines called "Boosters", and Philippe Kahn for Turbo Pascal. I'd especially like to thank Phil and Don for advice on financial formulae, and for their many suggestions of ways to improve the program. Of course I, alone, am responsible for the program. References: Brigham, Eugene F. 1983. Fundamentals of Financial Management. Third Edition. New York: Dryden Press. Smith, Jon M. 1976. Financial Analysis and Business Decisions on the Pocket Calculator. New York: John Wiley & Sons. Money Matters and Other Things If you want to contribute (and I hope you'll give it strong consideration), or you wish to send either valentines or vitriol, please address all correspondence, and make all checks out, to: Marc R. Feldesman 12655 SW 111th Place Tigard, Oregon 97223 (503)-620-9534 IBM-PC,XT, and AT, Lotus 1-2-3, Symphony, Framework, and SuperCalc 3 are registered trademarks of International Business Machines, Lotus Development Corporation, Ashton-Tate, and Sorcim- IUS. 10