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TIME VALUE OF MONEY-1

CA Aaditya Jain

CA Aaditya Jain

SUMMARIZED NOTES
OF

CA-FINAL
ONLY FOR
15TH JUNE 2011
SATELLITE BATCH

COMPILED BY
AADITYA JAIN SATELLITE SFM CLASSASS

CA AADITYA JAIN

All India Satellite Classes:

011-47665500

TIME VALUE OF MONEY-2

CA Aaditya Jain

CA Aaditya Jain

TIME VALUE OF MONEY

1.INTRODUCTION/WHY TIME VALUE OF MONEY
"Time Value Of Money" means that the value of money is different in different time periods.i.e Money has
a time value.
For Example : Rs. 100 received today is not the same as Rs. 100 received a year later.
At first instance all will think that there is no difference between both the option.But at closed look we will
realize that both the options are not comparable because cash flows are arising at different period of time.
The cash flows arising at different periods of time can be made comparable by using any one of the following two ways.
(i) Future Value/Compounding Technique
(ii) Present Value /Discounting Technique
2.FUTURE VALUE OF A SINGLE CASH FLOW/COMPOUNDING TECHNIQUE :
The process of finding tomorrow's value (future value) of today's money is known as compounding.or By
compounding we take all the cash flows forward to a common future date.
Symbolically : Future value = Present Value (1 + r)n
3.PRESENT VALUE OF A SINGLE CASH FLOW/DISCOUNTING TECHNIQUE/PRESENT
VALUE OF CASH FLOW FOR A SINGLE YEAR
The process of finding present value of future cash flows is known as discounting. Present value is today's
value of tomorrow's money. or By Discounting we bring all the cash flows backward to a common present
date.
Symbolically :Present Value =

Future Value
1 r n

4.PRESENT VALUE OF CASH FLOW FOR MORE THAN ONE YEAR-UNEVEN CASH FLOWS
AND DEFINITE PERIOD

Present Value =

Future Value
Future Value
Future Value
Future Value
3 ..........
1
2
n
n
1
2
3
1 r
1 AADITYA
r
1 JAIN
r
1 r
SATELLITE
SFM CLASSASS

5.PRESENT VALUE OF CASH FLOW FOR MORE THAN ONE YEAR-EQUAL CASH FLOW AND
DEFINITE PERIOD [ DEFERRED ANNUITY I.E CASH FLOW ARISING AT THE END OF EVERY
YEAR ]

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TIME VALUE OF MONEY-3

CA Aaditya Jain

CA Aaditya Jain

Present Value = Future Value PVAF(r %, n years) ,Where PVAF=Present Value Annuity Factor
6.PRESENT VALUE OF CASH FLOW FOR MORE THAN ONE YEAR-EQUAL CASH FLOW AND
DEFINITE PERIOD [ ANNUITY DUE I.E CASH FLOWARISING AT THE BEGINNING OF EVERY
YEAR ]
Present Value = Amount [1 PVAF(r %, n - 1 years)]
7.PRESENT VALUE OF CASH FLOW UPTO PERPETUITY/INFINITY/FOREVER-WITHOUT
GROUTH I.E EQUAL CASH FLOW & INDIFINITE PERIOD
Present Value =

Annual Cash Flow

Discount Rate

8.PRESENT VALUE OF CASH FLOW UPTO PERPETUITY/INFINITY/FOREVER-WITH

GROWTH I.E GROWING CASH FLOW & INDIFINITE PERIOD
Present Value =

CF1
Cash Flows Arising At Year End 1
=
Discount Rate Growth Rate
Discount Rate Growth Rate

9..INTERNAL RATE OF RETURN IN CASE OF SINGLE CASH FLOW

IRR is the discount rate at which NPV is zero.
It is the rate at which Cash Infows is equal to Cash Outflows
When rate is missing in the question,IRR Technique is used to find out the required rate.
Till now we were given rate and question was asking us to calculate PV or FV.But now PV & FV will be
given and we are required to calculate IRR
10.INTERNAL RATE OF RETURN IN CASE OF MULTIPLE UNEQUAL CASH FLOW
In such case we will have to use a short cut formula for finding out IRR
In such case we should use trial & error technique to find out IRR
We will discount the cash flows by two rates.One higher and one lower.
By higher rate we should get negative NPV & by lower rate we should get positive NPV.
Now to find exact discount rate we should use the following formula
Lower Rate NPV
(Higher Rate - Lower Rate)
:Lower Rate + LowerAADITYA
SATELLITE
Rate NPV JAIN
Higher
Rate NPV SFM CLASSASS

It is advisable that the difference between high rate and low rate must not be greater than 5 %.
It may be noted that higher the discounting rate,lower will be the present value.
11.INTERNAL RATE OF RETURN IN CASE OF MULTIPLE EQUAL CASH FLOW

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TIME VALUE OF MONEY-4

CA Aaditya Jain

CA Aaditya Jain

Same as above.Try a practical question to undersatnd IRR Technique more clearly

12.ANNUITY
What is Annuity ? Annuity is a series of equal cash flows arising upto a specific period of time.
What is Deferred Annuity ? When Cash Flows are arising at the end of every year then such annuity is
known as deferred annuity.
What is Annuity Due ? When Cash Flows are arising at the beginning of every year then such annuity is
known as annuity due.
13.PERPETUITY
What is Perpetuity ? Perpetuity is an Annuity series of equal cash flows arising upto infinity or forever.
Normally Life of the company is assumed to be perpetual.
Some Basic Point Relating To This Chapter :
Beginning of year 1 means Year 0 ; Beginning of year 2 means Year end 1 ;
Beginning of year 3 means Year end 2..............
If question is silent ,we will always assume cash flow arising at the end of the year.
If nature of rate of interest is silent , we will always assume it to be per annuam rate of interest .

SUMMARIZED NOTES IS PREPARED BY SIR FOR HELPING STUDENTS FOR

LAST TIME REVISION JUST BEFORE EXAM OR STUDENTS WHO WANT TO
HAVE A QUICK REVISION OF ALL THE CONCEPT IN SHORT PERIOD OF
TIME.WE WILL
APPRECIATE
YOUR FEEDBACK
REGARDING THIS SUMMAAADITYA
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