TIME_VALUE_OF_MONEY.ppt
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Transcript of TIME_VALUE_OF_MONEY.ppt
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The Time Value of Money
Money NOW
is worth more thanmoney LATER???
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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?
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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 -
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Time Value of Money
The value of ,nit of money is )ifferent in
)ifferent time erio)s$
Also -now as Time .reference for money$
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/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?
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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)$
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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
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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$
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To simlify un)erstan) thatthere are only a few *asic
tyes of techni;ues forcalculatin+ Time Value Of
Money$
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A sum of money to)ay is
calle) a resent value$
We )esi+nate it mathematically asoccurrin+ in time erio) &
E
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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$
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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
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The interest rate or +rowth
rate in a time value ro*lem is)esi+nate) *y i
/ e
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i$ 0omoun)in+
ii 1iscountin+
The first of the +eneral tye of time
value i)entifications is )one throu+h
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0omoun)in+ i)entifies #:uture value
an)
1iscountin+ i)entifies # .resent value
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To calculate the :uture value of cash
flows#
=n 6 .&4%i5n
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An e years?
=n 6 .&4%i5n
=n 6 %'&&&4%$%&5>
=n 6 Rs 1,610.51
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Te)ious 3o*' calculatin+ future value for @&
years or more$
1ifficult to calculate$
4%i5n value is easily calculate) *y
0omoun) sum of Re% Ta*le value
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,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
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/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$
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: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 %
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=een :uture value calculation for sin+le
ayment )one 8 resent$
0omoun)e) value of a series of
.ayment
?????????
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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$
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:or e
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: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$
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0omoun) /nterest factor for
Annuity Ta*le
=n6 A C 0V/:A 40om$ interest factor forfuture annuity5 4>9 G > years5
=n6 @&&& C >$>@H6 %%'&>@
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.resent Value I 1iscountin+
0urrent value of :uture amount$
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$
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.resent Value of Annuity
E&&