Time Value (Money)

7/28/2019 Time Value (Money)

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FINANCIAL MANAGEMENT

PRESENTATION

ON

TIME VALUE OF MONEY

Submitted To

Prof. (Dr.) Amarjeet S. Khalsa

Submitted By

Saijeeth Vasudevan


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TIME VALUE OF MONEY

Recognition of the time value of money in financial decision makingis extremely important.

Conceptually time value of money means that the value of a unit of

money is different in different time periods.

The values of a sum of money received today is more than its valuereceived after some time. Conversely, the sum of money received in

future is less valuable than it is today.

Since money received today has more value, investors would prefer

current receipt than future receipt.

The time value of money can also be preferred to as time preference

for money.


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Suppose Mr. Ram is given the choice of receiving Rs 1000 either now

or one year later . His choice would be obviously for the firstalternative as he can deposit the amount in his saving bank account

and earn a nominal rate of interest.

A person will invest today only if the person will get a preferredamount in the future.

Suppose the preferred rate of interest is 15%, then a person will invest

Rs. 5000 today if he or she gets a amount Rs 5750 after one year. Rs5750 is the future value and Rs 5000 is the present value.


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Techniques used to calculate value of money:

The process to calculate future value of money is

known as compounding.

The process to calculate present value of money

is known as discounting.


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COMPOUNDING TECHNIQUE

In this compound interest concept is used.

1) Future value of single amount:

Compound interest is the interest earned on a given deposit/principalthat has become a part of the principal at the end of a specified period.

Fn = Amount at the end of the period.

P= principal at the beginning of the period.

i = rate of interest.

n = number of years

CVF known as compound value factor which will be > 1 for positive i,

and will increase as i & n increases.


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For example Mr. Lalit invests in a saving bank account Rs 4500 at 10

percent interest compounded annually for five years.

Here P = 4500

i = 10

n = 5

Fn = 4500*(1+.1)^5

Fn = 7247.295


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2) Future value of an Annuity:

Annuity is a stream of equal annual cash flows.

Compound value factor for an annuity (CVFA) is themultiplier used to calculate the future/compound

value of an annuity at a specified rate over a given

period of time.


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For example Mr. rahul deposits Rs 2000 at the end of every year in his

saving account paying 6 percent interest compounded annually for

five years.

Here A= 2000

i = 6

n = 5

Fn = 2000[((1+.06)^5 - )/6]

Fn = 7247.295


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DISCOUNTING TECHNIQUE

1) Present value of single amount:

P = Fn/(1+i)^nP = Fn * PVFn,i

PVF means present value factor which is always < 1 for positive i.

2) Present value of an Annuity:

P = A*PVAFn,i

Where PVAF means present value factor of an annuity


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For example Mr. Ram has been given an opportunity to receive Rs

1060 one year from now. He knows that he can earn 6 percent interest

on his investment. What amount will be prepared to invest for this

opportunity.

Fn= 1060

n = 1

i = .06

Then,

P = 1060/1.06

P = Rs 1000


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PRESENT VALUE OF AN UNEVEN PERIODIC

SUM

In this we calculate the present value of each cashflow aggregate all present values


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THANK YOU

Time Value (Money)

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