You owe me $325.00 as of 1-June. Instead of paying me, you note that I will owe you $778.00 on 12-July and that we should just settle up then. I, being an accountant, suggest instead that we settle up on 10-Aug so as to prevent the other party from constantly being on the lookout for how to get 2000 dollars fast. Here’s one way to find that date:
Start by setting up a spreadsheet to compute time value of money on the two amounts.
I set an interest rate of 10%, but it doesn’t matter what the interest rate is. We won’t actually be paying interest to each other. And regardless of the rate, the settlement date would calculate the same because the same rate is applied to both balances. My initial setting for days is 41, the difference between the loan dates.
This setup reveals that you will owe me $3.67 at 10% interest on 7/12/08. The question is: how long should I hold your $778 to accrue the same amount of interest. I used Goal Seek to find out.
Change the number of days until the difference between the accrued interest amounts is zero. And go.
If I pay you back in 70.7 days, then we will be square from a TVM point of view (and what other point of view is there).