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Time Value of Money
Time Value of Money
Time Value of Money
FINANCIAL MANAGEMENT
Why money has time value?
1.Inflation
2.Earning Power of Money
3.Uncertainty
Future Value of Single Amount
( FV )=PV × ( 1+r )n
FV= Future Value
PV = Present Value
r= Interest rate/return
n= number of periods/years
=Rs. 114617
( 1+.1 )4 −1
( PVA )=300000
{ .1 × ( 1+.1 )4 }
Rule of 72
It talks about doubling period. Money gets double in 72/r
years(where r is the rate of interest)
Assume that the rate of interest is 10% therefore money will
get double in 72/10=7.2 yrs
n
1+ g
Present Value of Growing Annuity=A 1× { 1− ( )
1+r
r −g
}
Where A 1= A 0 × (1+ g )
10000=1000/0.10
Annuity Due
Effective Vs. Stated rate
Real Vs. Nominal Rate
Practice Problems
1.You can save Rs. 3000 a year for 5 years and
Rs. 8000 a year for 10 years thereafter. What
will these savings cumulate to at the end of 15
years, if the interest rate is 10% p.a.?
=3000 X FVA Eq. X (1+r)^10 + 8000 X FVA Eq.