TIME_VALUE_OF_MONEY.ppt

7/25/2019 TIME_VALUE_OF_MONEY.ppt

1/28

The Time Value of Money

Money NOW

is worth more thanmoney LATER???


2/28

You have won a cash ri!e" You have two ayment

otions#

A$ Receive Rs %&'&&& now

OR

($ Receive Rs %&'&&& in three years

Which otion woul) you choose?


3/28

Money availa*le at the resent time is

worth more than the same amount in the

future )ue to its otential earnin+ caacity$

Receivin+ Rs %&'&&& to)ay' you are

*alance) to increase the future valueof

your money *y investin+ an) +ainin+interest over a erio) of time$
http://www.investopedia.com/terms/f/futurevalue.asphttp://www.investopedia.com/terms/f/futurevalue.asp


4/28

Time Value of Money

The value of ,nit of money is )ifferent in

)ifferent time erio)s$

Also -now as Time .reference for money$


5/28

/M.ORTAN0E

0A./TAL (,12ET/N2

0ost of .ro3ect# Rs %&'&&'&&&$ 40ash

Outflow5 .erio) 6% year .rofit 6 7&'&&&

One year later the total amount#

%&'7&'&&& 4cash inflow5

Whether to accet the ro3ect?


6/28

0onsi)er another alternative

Rs %&'&&'&&& suose investe) in *an-

8 %&9 interest

Then the cash inflow after % year is Rs

%%'&&'&&&

Earlier )ecision will have to *e revise)$


7/28

On the other han) when )ecision is ma)e

to raise a loan of Rs %&'&&'&&& from

financial institution$

:irst i)entify the cash inflow 4:uture5

???????? To )eci)e uon the commitments 4/nterest

an) Amount ayment5


8/28

1ecision *ase) on cash flow?

Meanin+ful comarison cash flow that resultsin )ifferent time erio)s it is necessary to

convert the sum of amount in common oint$


9/28

To simlify un)erstan) thatthere are only a few *asic

tyes of techni;ues forcalculatin+ Time Value Of

Money$


10/28

A sum of money to)ay is

calle) a resent value$

We )esi+nate it mathematically asoccurrin+ in time erio) &

E


11/28

A sum of money at a future

time is terme) a future value

We )esi+nate it mathematically as

occurrin+ in time erio) n$

:or e'&&& refers to Rs

>'&&& after n erio)s from now$


12/28

The num*er of time erio)s in

a time value ro*lem is

)esi+nate) *y n$

n may *e num*er of years' months n may *e a num*er of any )efine) time

erio)s


13/28

The interest rate or +rowth

rate in a time value ro*lem is)esi+nate) *y i

/ e


14/28

i$ 0omoun)in+

ii 1iscountin+

The first of the +eneral tye of time

value i)entifications is )one throu+h


15/28

0omoun)in+ i)entifies #:uture value

an)

1iscountin+ i)entifies # .resent value


16/28

To calculate the :uture value of cash

flows#

=n 6 .&4%i5n


17/28

An e years?

=n 6 .&4%i5n

=n 6 %'&&&4%$%&5>

=n 6 Rs 1,610.51


18/28

Te)ious 3o*' calculatin+ future value for @&

years or more$

1ifficult to calculate$

4%i5n value is easily calculate) *y

0omoun) sum of Re% Ta*le value


19/28

,sin+ 0omoun) sum of Re%

Ta*le value

1eosit Rs %&&& to)ay in a *an- ays %&

ercent interest comoun)e) annually$

ow much will the )eosit +row to after 7

years$

The value of :V/: for %&9 7 years shows

@$%BB

Therefore future value6 %&&&C@$%BB

6 @'%BB


20/28

/mortant O*servations

/nterest rate increases for a +iven year'

the comoun)in+ interest factor also

increases$

i+her the interest rate hi+her the future

cash flow$


21/28

:or the +iven /nterest rate the future sum

of money increases with the assa+e of

time$

Lon+er the erio) of time hi+her the

/nterest :actor$

Dero6 %


22/28

=een :uture value calculation for sin+le

ayment )one 8 resent$

0omoun)e) value of a series of

.ayment

?????????


23/28

Time value ro*lems involve is

Annuities

An annuity is an amount of money thatoccurs 4receive) or ai)5 in e;ual

amounts at e;ual time intervals$

=tream of e;ual annual cash flows$


24/28

:or e


25/28

:uture value Annuity

F )eosits Rs @'&&& at en) of every year

for > years in his savin+s account ayin+

>9 interest comoun)e) annually$

1etermine the sum of amt he will receiveat the en) of >thyear$


26/28

0omoun) /nterest factor for

Annuity Ta*le

=n6 A C 0V/:A 40om$ interest factor forfuture annuity5 4>9 G > years5

=n6 @&&& C >$>@H6 %%'&>@


27/28

.resent Value I 1iscountin+

0urrent value of :uture amount$

Amount investe) to)ay 8 a +iven interest

rate over a secifie) time erio) to e;ual

the future amount$ 1iscountin+ is the resent value of future

amount$


28/28

.resent Value of Annuity

E&&

TIME_VALUE_OF_MONEY.ppt

Documents

Transcript of TIME_VALUE_OF_MONEY.ppt