Granted this is some Level 1 material, I’m having trouble knowing when do have PV, PMT, and FV be positive or negative on any IRR-related questions that ask you to calculate pre-/post-tax return requirements…
Part of me thinks intuitively and says that the FV should always be positive because it’s a figure that we receive back to us at a later date and another part of me says that savings (PMT) are always positive and expenses are always negative, but I find that I’m still screwing up the proper sign usage.
Does anyone have any good rules of thumb apart from PV and FV always need to have opposite signs?
Thanks!
Best way I can explain this is to think of this in terms of cash flow. Is the money going in or coming out? If it’s going in, then it’s negative. If it’s coming out, it’s positive.
For example, you start with $100,000 in the portfolio and you plan on contributing another $10,000 at the end of each year for the next 10 years. The goal is to have $400,000 at the end of the 10 year period.
So in the above, PV would be -$100,000 because you are putting in (starting with) that much and the PMT would be -$10,000 because you paying in that much each year. FV would be +$400,000 because that’s how much you want to have (take out) at the end of 10 years.
Hope that helps.
(PS, as far as Phil Collins goes, meh…)
well i think you have to use positive sign for expenses more than your income that will be covered by the fund because it assumes that the fund will earn this much before it goes out…so it’s part of the required rate of return.
so expenses are treated as positive in the TVM calculation.