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Content
• Time Value of Money
• Present and Future Value Concepts
• Calculations and Applications
Time Value of Money
• The principle of Time Value of Money is like a magical concept that explains
how the value of money changes over time. Anyone can think of it like this:
if a person has 100 rupees today, they are worth more than 100 rupees a
year from now. This means that money can become even more valuable
over time.
• To understand this, consider this: if you have 1,000 rupees today and you
invest it in something, you could earn more money by the end of the year
(in the form of interest or profit). So, the 1,000 rupees you have today
could grow to be more than 1,000 rupees next year. Therefore, when we
talk about the Time Value of Money, we are acknowledging that having
money today is better because we can use it to earn even more money.
This concept is crucial in financial decisions, helping us make smart choices
about when to spend, save, or invest our money wisely
Present and Future Value Concepts
• Present Value:
• Definition: Present Value (PV) is the current worth of a sum of money
that is to be received or paid in the future. It's the idea that the value
of money today is worth more than the same amount of money in the
future due to its potential earning capacity.
• Explanation: If you have a certain amount of money you expect to
receive in the future, you can use the present value formula to
calculate what that future amount is worth in today's terms. It helps
in comparing the value of money over different time periods and in
making decisions about investments or loans.
• The present value formula is PV = FV/(1 + i)n
• where PV = present value, FV = future value, i = decimalized interest
rate, and n = number of periods.
Future Value:
• Definition: Future Value (FV) is the value of an investment or a sum of
money at a specific time in the future, assuming a certain interest
rate. It represents how much an investment will be worth after
earning interest over a specific period.
• The future value formula is FV = PV× (1 + i) n.
• Explanation: If you invest a certain amount of money today, the
future value formula helps you determine how much that investment
will grow to over time. It's a crucial concept in financial planning,
helping individuals and businesses estimate the potential returns on
their investments.
• These concepts are widely used in finance for making decisions about
investments, loans, and other financial transactions. Present Value
helps in assessing the current worth of future cash flows, while
Future Value helps in projecting the value of an investment over time.
Understanding these concepts is fundamental to sound financial
planning and decision-making.
Application
• 1. Investment Planning:
• Scenario: Individuals or businesses use TVM to decide how much to
invest today to reach a specific financial goal in the future.
• 2. Loan Repayment:
• Scenario: Lenders and borrowers use TVM to determine the amount
of each loan payment or the total repayment amount.
• 3. Retirement Savings:
• Scenario: TVM is applied to plan for retirement by calculating how
much needs to be saved each month to achieve a desired retirement
fund.
• 4. Business Valuation:
• Scenario: In business, TVM is used to assess the present value of
future cash flows, helping in company valuation and investment
decisions.
• 5. Real Estate:
• Scenario: Real estate professionals use TVM to evaluate the
profitability of property investments by calculating the present value
of expected rental income or future sale proceeds.
• 6. Budgeting and Financing:
• Scenario: TVM assists in budgeting by determining the present value
of future expenses or income, guiding financial planning and decision-
making.
 Summary
YOU GOT THIS
Financial Analysis
Ratio Analysis
• Time Value of Money (Liquidity, Solvency, Profitability)
• Present and Future Value Trend Analysis
Concepts
• Calculations and Applications

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