Chapter Time Value of Money LEARNING OBJECTIVES At the end of this chapter, you should be able to: = Discuss the role of time value in finance and the use of various techniques in time value of money. Understand the concept of future value and present value and the components involved in the calculations. Understand the application of present value (PV) in business. Understand the application of future value (FV) in business. Understand types of annuity and their applications. Understand the calculation of effective annual rate (EAR), annual Percentage rate (APR) and annual percentage yield (APY). Calculate other components in time value of money such as periods, interest rate and loan amortization,nepeee# Financial Management People hope to be compensated for nor spending their money today, and instead to invest. Time value of money relates to the concept that ‘asum of money today is worth more than the same ‘sum in the future GERD INTRODUCTION Finance and financial planning deal with the value of mone; value in general tends to increase over time compounding \e rate of return, whereas loaned funds magnify the amount of the debt. Hence, managing funds, in fhe form of investment or borrowing over a specified period of time, is referred as tare value of money. « Itshould be clearly understood that in finance, the focus is on economic gains and not accounting gains, thus the timing of cash flows (receipt of cash or payments) isto be considered as a very important factor in view of the discussions on time value cr money. Time value of money is also regarded as financial mathematics which is ve, much related t6 calculations of value of money either as of today ot at a given future date. This involves present value and future value of cash flo Ws. ‘Inis chapter comprises some important discussions involving concepts, problem solving-based calcul: lations and the techniques used in performing those calculations In this chapter, readers will be taught to be familiar with financial mathematies and are required to perform calculations using various techniques. Readers are however reminded of the fact that this financial mathematics is not just a set ot series of mathematical caleulations—it requires readers to clearly understand the concepts and implications relating to the calculations. 'Y Over time. Investment with th THE TIME VALUE OF MONEY People generally earn money because they hope to spend it in the future. Ifthey save it, rather than spend it in the period in which it was earned, it is usually because they want to spend it sometime in the future. However, for most people, present consumption may be more desirable than future consumption because the future is uncertain. ‘Live and be merry, for tomotrow we may die’ is a rationale used over the ages to justify the urge to buy now rather than deferring gratifications to later. For this Teason, most of us would much prefer to have a ringgit today rather than a year from now, and must be given something extra as an incentive to save the money and not spend it today. Looking at the transaction from the borrower's perspective, there are consumers and businesses (not to mention the deficit-ridden governments) that really eed the money today and are willing to promise to pay back more than that amount of money in the future. Businesses can invest’borrowed funds in capital to create profits which are hopefully more than sufficient to repay the borrowed funds (the principal) plus interest. Consumers and the government borrow for various reasons but they are expected to have generated enough income in the future to repay the principal and interest. es joney u Beseiving the monies in the future. After ‘the notion that monies that you have ica Fp© TimeValueol Money 209 FUTURE VALUE OF A SINGLE AMOUNT In simple words, a tinggit tomorrow is worth more than a ringgit toda! To further understand this, let us say someone gives us RM 1,000.00 today, and we are to pay back the money in one year's time. Due to inflationary rate, which then results in lower im ae vi 100.00 vi Purchasing Power, the lender knows the actual or intrinsic value of the RM1,0 \ ret aeeg on will diléte, hence, some form of compensation is needed to maintain the ‘economic Value’ of the RM1,000.00. Consequently, we will have to pay back the RM1,000.00 with some compensation (interest payment). The amount that is paid after one year is Galled future value (FV) and the amount received today is called present value (PV) This fundamental concept is linked to compounding. Similarly, the Tuture value of your deposit at the end of one year is equal to the present value plus the interest. The Interest is, of Course, equal to the present value times the rate of interest, expressed as a percentage. Refer to the formula below: FV, = PV, + interest payment \ where ‘a PY is the future value at the end of the first period (year 1) PV is the present value of the amount being saved or invested today Example 8.1 ‘You have deposited RM1,000.00 today and the bank offers a 7% interest rate per annum. If you plan to save your money for 3 years, determine the future values in Years 1,2 and 3. Solution: ‘Year 1: 1,000 + (1,000 x 0.07) ‘Year 2: 1,070 + (1,070 xRieter figures as found in Example 8.1 above, calculate the future value of RM, 000 today in year 3. Solution: FV, = 1,000 (1+ 0.07)" = 1,000 x 1.07 = 1,225.04: ‘The component in the formula, (1+ r)* , a annonae 'salso known asfisture value interest factor) i, *ssometimes represented aslFVIF,, he respective values Tore ues ofrand n values have been compiled ifr ancial table which may b ‘The FVIF,, values are found in Appendix 1 of this book. {you look up the future value interest factor for 3 Periods (3 years) and 7% (interest rate), it is 1.2250. Thus, by using Table 1, the solution for the same requirement asin Example 8.2, is as in Example 8.3, ¢ found in the appendices, Example 8.3 FY, =PVx (EVIE) = PVxFVIE = 1,000 x 1.2380" =1,225.00 Note: The answer is slightly different from the earlier calculations, owing to rounding difference, Financial calculators are often used in solvin ‘money. Usually, when using a fin Feith function key from left to right of the table; T, followed by FV =, the answer will be shown as Y ~ interest rate per annum, CPTa g.3.1 Compounding ‘The discussion that we have had thus far is based on one important assumption— the calculation of interest payment is carried out only once a year, Therefore, the number of compounding is One (once in.a year). However, in reality, as the financial sector becomes highly competitive, individual banks tend to come up with some attractive packages. One of the strategies used to attract customers is by adjusting the frequency of compounding. Hence, compounding (frequency of interest calculation) can be done annually (once a year), semi-annually (twice a year), quarterly (four times aa year), monthly (twelve times a year), daily (365 times a year) or even continuously. ‘Thus, some changes need to be made on the formula, as shown below: When performing compounding computations, the frequency of compounding within a given period should be adjusted fr. n = number of years x number of compounding periods in a year (You must also divide the annual rate of interest by that same number of compounding periods in a year:) we Example 8.4 Once again, we use the same requirement as in Example 8.2. Let us say the bank offers an 8% interest rate for any deposit but the frequency of compounding is semi-annual, Calculate the future value at the end of the 3rd year. 3 annual rate of interest/number of compounding periods in a year Solutio To do the calculation, the formula needs to be modified, as illustrated below. Please take note that m7 is the number of compounding FV,= PV x {1 + (r/m))"™" hence, PV, = 1,000 x {1 + (0.08/2)}**? 000 x 1.2653 265.30 Readers should note that there is an increase in the frequency of compounding. In Example 8.2 above, the number of times of interest calculations is 3 (owing to annual compounding). Clearly, in the case of semi-annual compounding, the compounding, occurs every 6 months or twice a year with a total of 6 times over a 3-year period. Using the financial table (Appendix 1) readers should therefore refer to r = 4% and 1 = 6 periods. In this case, the FVIF is 1.2653, which is then multiplied by 1,000 to give us a value of 1,265.30 once again. ‘When using the financial calculator, readers have an option either to change the ‘compounding figure (P/Y) to 6 or retain it as P/Y = 1, but the computation will be adjusted as illustrated below: fie i. ‘hat when we have infinite frequency Gennes aa He ot means more than 365 times), compoun . a ay Ths is typically the assumption made by rese; ae Te formula then wil be as follows: reseal 4 EV, = PVxe™" eee ails as per Example 8.2, with the interest rate on deposit euse 8% per annum, but this time round, on continuous compounding. Deter Ra value of a deposit of RM1,000 in Year 3 and Year 5. os FV, = PV x e*" FV. = 1,000 x eo = 1,271.25 1,000 X e5* 00 1,491.82 FY, The calculation of the present value is accomplished by using the same understanding as what we have discussed earlier. In other words, the future value is determined using waluelsthecunem today’s value (present value), and in this case, we are interested to know today’s Gfagivenfuturecash of the money that is expected to be received at a specified period of time. Itis tf current value of a future cash flow. In short, the present value is the value ofa cash flow or sum that is needed to be deposited today at the given interest rate Present value tells us the amount of money needed today in order to obtain a des amount after a certain period of time. To find the present value, we can begin simple example. maenorr ope Y| Example 8.6 Mary wishes to have RM10,000 in her bank account in three years’ time, Sh el Iculate the future value, the Present value Id exist ist for the Present value cavalue for RM10,000 in the above example can also be ‘the amount by the present value interest factor which can be eal tables. The present value interest factor (PVIF) is available in Appendix Jook up the present value interest factor for 3 years (period 3) and 6% *ate) itis 0.8396. Thus, the formula using Appendix 3 is as follows: r PV, = EV x (VIF, ,) [7 = 6%, = 3] = 10,000 x 0.8396 8,396.00 (the answer is slightly different from the earlier calculations) Using the financial calculator, the computation is illustrated below: oo | = ef N | Ge. -83%19 (Che negative sign means the money needs to be invested.) x In finance, the understanding of the terminologies used in financial mathematics 4 : a ‘Compounding rates the is essentially important. The interest rate for future value calculation is referted as | interestrate used forfurure | ‘compounding rate. In contrast, the use of the same interest rate for present value | value computation ef calculation is referred as discounting rate. However, in general, the rate we use for present value calculation is simply called a discount rate. This discount rate may refer to required fate of return, opportunity cost. cost of capital, or even weighted average cost of capital. Further explanation will be given in the subsequent chapters Readers should spend some time to look at the figures in Appendix 3. You will notice that the PVIF values decrease as the: + further into the future the future cash flow is (i.e. m increases), and s + discount rate increases. a 3 interest rate used for This in turn, when applied on future cash flows, will give us a lower present value. npr Example 8.7 ‘A Malaysian investor may invest in a property sector, expecting to gain RM54,000 after seven years, Based on a careful study of other investment alternatives, he believes that a 20 percent annual return compounded quarterly is a reasonable return to earn on this investment. How much should he pay for it today? Solution: PY = 4,n=7 x4 = 28,1 = 20, PMT = 0, FV = 54,000 = CPT PV RM13,775.06Payment period "anmuity due - where each equal paymentis made tthe beginning of each period nat a Time——>- 1 Present Value of an Ordinary Annuity ty cannot be easily calculated arithmetically Ii Rather, the present value of each payment mi att to the power of the ni C ‘The present value of an annuil present value of a future sum Peulated by dividing each by 1 plus the discount rate rose of periods involved. Suppose we want to find the present value of RM5O received every year for th years at a discount rate of 7%. The calculation is shown in Figure 8.2 below: om Figure 8.2 Calculation of present value on ordinary sateat * tad wad annuity i ; t { 2 3. 50.00 / (1.07)'|= 48.73 46.73 2 hae 50,00 / (1.07)? = 43.67 40.82 50.00 / (1.07) = 40.82 131.22 Example 8.8 Ara on pare poe pays her RM5,000 per year for 3 years, . Amy wants to know the present value of thefatical ila fe ong Period. ‘The formula to calculate Elie = 13,121.58 ‘The above computation might appear dauntin, using the financial table wi be avoided. Here, we Present value interest. factor annuity (PVIE, ). Remember, it is actually [1/(1 + x) 4 WL + Pt a + 1). By referring ton = 3, r= 7% thus PVIFA = 2.6243, ‘The details are as follows: PVA= PMT x (PVIFA, ) = 5000 x (2.6243) 13,121.50 (answer tends to slightly differ owing to rounding error) 1312158 When using a financial calculator, the following instructions must be followed: (3.N, 7 1, 5000 PMT CPT PV). f In the earlier calculations, all the annuities involve end-of-the-year receipts ‘or payments; therefore, they are categorized as ordinary annuity. This ‘means, ssuming the current year is year 0, the first cash receipt or Payment starts at year {Jn the real world, however, the annuities are often paid with the fen sane : starting at the beginning of the year, which means it starts immec of annuity is called an annuity im] ‘The answer is RM13,121.58, 5.2 Present Value of an Annuity DueExample 8.10 Raj has won a jackpot RMIL million and will get paid in 5 annual payments immediately, over a period of five years. If Rajs opportunity cost of funds is 8% what is the present value of his jackpot?” Solution: First, we must calculate the size of the annual payment which is RM1 million, divided by 5 or RM200,000 for each payment. He will receive the frst paymeni today, followed by a series of constant payments of 4 times, We can calculate the present value using the same formula used earlier but multiplied by (+ ras shown below: ge 1 te 1 PV, = PMT x tg x ( fe l{* + nor PV, = PMT x (PVIFA ,,) (1+) 100,000 X (PVIFA , .) (1 + 0.08) 200,000 X 3.9927 x 1.08 = 862,423.20 ~The computation of the formula is as follows: (ue‘al calculators will automaticall zt calc st, change the mode to BEG Re oy p’ or end-of-the-year). In this case, with r ity due by using th ‘BEG’ the calculations wa n BEG mode, 5 N, 8% I, 200,000 PMT, ° pT PV. ‘ In reality, individuals or business people should justi ight typ als oF | s justify the ri : that gives more value in their financial activities, cute inane eae receive payments, then we will be better off if i Petey thats t yea 0 off ifis annuity due as the first paymentstarts 5.3 Present Value of a Perpetuity ’ “igs ee Bere a Pays a constant amount at fixed intervals over a specified period of A oe called an annuity. However, if the receipts or payments of these equal periodic cash flows are to be made till infinity or forever, then it is called a ee e formula to calculate the present value of a perpetuity is as follows: . py =2MT ; r where: i: ; ris interest rate/discount rate i PMT denotes payment/cash flow Example 8.11 Roslan has invested in a special government bond that provides income on investment of KM100 per annum in perpetuity. Determine the present value of this perpetual annuity if you are told that the time value of money is 8% per annum. Solution: Rye EMT T pee 0.08 = 1,250 ie. RM1,250 8.5.4. Future Value of an Ordinary Annuity Ae the amount that we will accumulate by makin, ate over a specified period of time. Figure future value of an annuity refers to 4 t a given interest Fé “ ee ae satanic is determined using an | interest rate of a soaghuientoooonn oiz q OOM: eee25,00 x (1.09)' ee 25.00 x (1.09) ‘The conceptual formula is FVA = PMT (1+?) + PMT(1+r) = PMT [(1+7)! + (Lt)? + as follows: +. + PMT(1 +r)" + (It) whereby the sum in the bracket is the future value interest factor of an ar (FVIFA). " “These factors can also be found in Table 2 in the Appendices. Thus, the financial table, the formula can be derived as follows: FVA = PMT x (FVIFA,,) When using the mathematical expression, the simplified formula sp for future value annuity calculation is as follows: EVIFA = “ES ‘Thus, FVA = PMT X Example 8.12 Bakr ps to put aside RM5,000 per year so that he can make @ Payment on a BMW car in 6 years’ time. If he makes the payments at th teach year n the an ae 8% on his deposits, how much will he have acum * : the solution usin, using the thr ied: watery Panels peti techniques: mathemal © mathematical expression:ring to the financial table (EVIFA) is 7.3359, based on » A = PMT X (PVIFA ,...) = 5000. 7.3359 ot alba = 36,679.50 2 the future =6.r= 8%, cA i soottsloz ‘when using the financial calculator, et the following instruct, Wala 4 [gn 81, 5000 PMT, CPT FVI. The answers Php tat followed: | | : ee — 3679.64 Readers should note that the negative sign is to be ignored. 8.5.5 Future Value of an Annuity Due If payments were to begin immediately, rather than at the end of the first period, you must therefore calculate the future value of an annuity due. Since the last payment is made at the beginning of the last period, the entire future value of the annuity earns an extra year’s interest by the end of the last period. Similar to the present value ofan annuity calculation, to calculate the future value of an annuity due, merely multiply the future value of the annuity by 1 plus the interest rate. Refer to Figure 8.5 below. Figure 85 25.00 x (1.09)' 25.00 x (1.09)°i ‘ rey i wae ois " ined in Example 8.12 above. If however, we are to ep ae cide RMS,000 per year starting now and still earns 8 % on _| that Bake iow much wil he have accumalated atthe end of 6 yeas? his deposits, i ivocr t to note that the yearly payments start at the beginning of the year | is important i ‘ a rat tov a 6-year period. The calculation is as follows: ‘ L+n-1 pveemtx(2t2— a+» ¥ x 0 x (0 208" - cn Ja + 008) = 39,614.02 or FVA = PMT x (EVIFA ,,. ,) (1 + 0.08) (refer to financial table) 000 x 7.3359 x 1.08 39,613.86 Again, when using the financial calculator, change the mode to BEG. In this case, with the BEG mode - 6 N, 8% 1, -5000 PMT, CPT FV. Litem sey a PMT N 1 — 39,613.86 E53 DETERMINING PAYMENTS, PERIODS AND INTEREST RATES It should be pointed out here value or future value, either same thing goes t of the annuity p applies it Such eases are not difficult nore jche? for an however, the finat ‘Ncouraged to use financi: derstanding of time value of mi eee‘when the interest rate changes marginally in solvit 1 very short period of time. Take a | a ne look at the following examp| Example 8.14 to buy an apartment. The cost of the apartment. is RM150,000. They can get a 25 Year mortgage at 8% and plan to make a down payment of 20% of the selling price. What will be their monthly mortgage payment? Solution This situation involves amor means that both the princi monthly payments, over th of each payment principal amount, payment also invol tization or an amortized loan. An amortized loan ipal and interest are paid off simultaneously, in equal '¢ period or term of the loan. However, a large portion Boes to interest charges and a small portion of it goes to the which actually reduces the debt with the bank. Remember, this Ives annuity (equal monthly payments). The down Payment they have to make is 20% x RM150,000 = RM30,000. Thus, the loan amount will be RM120,000, which is also the present value of the monthly annuity over the next 25 years. The term of the loan is 25 years, which shall result in 300 monthly mortgage payments (being made up of 25 years times 12 months = 300), while the interest rate per period is 8%/12 or 0.6567% per month, With the right conceptual understanding, we can al to find the solution as illustrated below: Iso use a financial calculator = 120000 PV 25x12 N 8/12 1 a CPT PMT 926.18 Instruction: [25 x 12 N, 8/12 I, -120000 PV, CPT PMT]. The answer is RM926.18 per month. é 4 paticesneseones directly the cash flow payment C by using the following formula: PxXr ae ic 1 a+r where: Cis the cash flow payment Pis the principal (amount borrowed) ris the interest rate : imber of, ES snojin tea 16 23, ihc exampe given above, P= RMI20000,r = 0.006 \ ds8.6.1. Effective Annual Rate ® n ding of the compounding concept, we shall extend our discussion SCT gee ), This rate has a very significant im ene i ney but also in daily business acti mb cote ef rone bt a dal bins ie Bel tive annual ate the mbar of future value or present value can also be called as nominal rate. As we lenny se compounding frequency on the nominal rate, then the actual rate of return vl tend to differ from the nominal rate and this ‘actual’ rate is called the ‘effective’ — rate. Hence, the formula to calculate EAR is given by: EAR=(1+2)"—1 ea meu The effective annual rate or simply effective rate may also be defined as the interest rateon a loan or financial product restated from the nominal interest rate as an interest rate with annual compound interest payable in arrears. In. other words, it is the equivalent annual fate after adjusting for the frequency of compounding that occurs within a year. Its used to compare the annual interest between loans with different compounding terms (daily, monthly, annually, or other) Let us say the nominal rate offered by two different banks is 8 %. Bank 1 offers a semi-annual compounded rate (m = 2) and Bank 2 offers a quarterly compounded rate (m = 4). Take note that as the number of compounding increases, EAR also marginally improves, thus depositors will be better off with greater compounding. EAR Banki 8.6.2. Annual Percentage Rate ur Percentage rate (APR) refers to the rate o short term rate (eg, semi-annually, quarterly, eer 7 a year It ls-airate that is percentage rate is ca « 1s stated in annual terms. For example, bank is secteniomate Sharing is cea card holders 12°% on a monthly basis Their cee the carey On the one aa 4.4%. This 14.4% is the APR. ann can be obtained from a savings PETCenta the periodic short-term rate to We take 1 plus period (1 +r)"—1, Therefore, let us account, thus, (1 + 0.012)" btained by multiplying the periodic monthly, etc.) by the number of periodsTime Value of Money and Investment Analysis’ Explanations and Spreadsheet ions for Agricultural and Agribusiness Firs by Bruce J. Sherrick, Paul N. Ellinger and David A Lins https://docs google com/viewer?a=v8q =cacheiUvbbHH)KREJagma tketing extension psu edu/Business/FinancialTools/TimeValueMoney Applicat 2, Free video lectures on time value of money, http//freevideolectures.com/Course/2748/ Corporate- Finance/13# 3, Time Value of Money: Highlights, by Professor lan Giddy http//peoplestern.nyuedu/ igiddy/tvmsum.htm 4, Time value of Money- variables http//www.tvmcal time_value_problems s.com/tvm/how_to_think_about_ Time value of money is based on the concept that monies today should be worth more in the future. ¢ When money is invested today, we expect it to grow to a bigger sum. The amount in the future is known as future value. ¢ Computation of the future value: of a given sum of money today utilizes the principle of compounding, based on a given required rate of return, known as the compound rate. @ Thenumber of times (frequency of) compounding takes place must be considered when attempting to compute the future value. Present value is the current value on a future cash flow. Computation of the present value of a future cash flow utilizes the principle of discounting, based ‘on a given required rate of return, known as the discount rate, Future cash flows are discounted at the discount rate. Discussion and Assignment Questions coe the rationale pier interest to lenders? The higher the discount rate, the lower the present value of the future cash flows. Annuity is a series of equal payments made at fixed intervals for a specified number of periods. Ordinary annuity is when each annuity payment occurs at the end of each period. ‘Annuity due is when each annuity payment occurs at the beginning of each period. Perpetuities relate to periodic cash flows of equal amounts that occur till infinity or forever. Computations can be performed to determine the present value of annuities and perpetuities, as well as future value of annuities. Effective annual rate (EAR) is the effective rate that an investment earns or is incurred on a loan’ after adjusting for the frequency of compounding that occurs within a year. Annual percentage rate (APR) is the annualized | rate of the shoft-term rate (say monthly rate).‘Amin buys a 4-year certificate of deposi t , aa of 5%, If he puts RM3900 in the cD hove be L-8Hong puts RM33000 into his investment portfolio that pays an annual rate 0 interest of 5.58%, compounded and credited dail ly. How much would she the end of 250 days? Calculate the effective annual rate (EAR). =e 9. Badang wants to have RM5,000 in his bank account to buy a brand new Volvo car jn four years'time, He has the option to invest fora return of 7% How much should he invest now to buy that car? AO. Based on his father’s arrangement, Loga is to get RMI115,000 on his 254 birth which is 5 years away. The funds have already been deposited in a bank and! Loga wants to find out the present value of the fund, Loga has also found out that banks are, in general, offering a 5% interest rate. Calculate the present value of the fund, (AT Ali has just retired and will receive an annuity of RM1,900 per month for 20 years. Payments are made at the end of each month, IF he usés a discount rate with an annual return of 7%, what is the present value of his annuity? 12. Sun Wee has just received a special reward of RM15 million lottery. Today the government will issue the first of 10 annual payments for RM160,000. Sun Wee has her own opportunity cost of 8%. Is Sun Wee better off or worse-off with this arrangement? Explain your answer. AS: If you want to retire in 20 years at the age of 60, how much must you deposit today in order to receive an annuity payment of RM1800 per month for the next 20 years? You would also like to have the first payment at the beginning of-the year. The annual interest rate offered by the market is 9 %, Af, Bably wants to buy an asset that costs him monies that he currently does not have, _ ~~ hence the need to save money for this purpose. If he manages to save RM650 per month and makes the payments at the end of each month, how much will he have accumulated at the end of 5 years if he manages to earn an annual rate of 8% on his savings? What if he starts his savings at the beginning of the month? Compare answers. 15. Sheila is looking for a flat. She has found one that costs RM300,000. She ct 30-year mortgage with 8% interest rate and plans to make a down payment oftthe selling price. What will be her monthly mortgage pe asks her to pay the first payment at the beginning of the month? i i at the, You plan to deposit RM300 into a savings account leh for the next 6 years. Suppose the bank offers: a) 5% compounded monthly b) 5% compounded quarterly ald Calculate the value that you wot in part a) and b). What would happen if month? Give your comments. ty18 Time Valve of e 17, Visit the following web-link: a hatp//wwwatsc.utoronto.ca/~wei/teaching/mgtc03/tvm.pdf est » You will find a series of further practice questions and answers. Go through those exercises. ny 18. Visit the following web-link: http://web utk edu/~jwachowi/mequiz/me3.html a You will find a series of further practice questions. Go through those exercises. 19. Visit the following web-link car http://www.me.utexas.edu/~jensen/ORMM/omie/problems/units/economics/ jul tvm_probs/tvm_fhtml You will find a series of further practice questions and answers. Go through those day, exercises. 0 ie 20. Visit the following web-link: https://docs.google.com/viewer?a=v&q=cache:wmE ‘i Br3Aha2c].www-westga.edu/~rbest/finc351 1/sampleprobs/sample5 pdf : You will find a series of further practice questioris and answers. Go through those rs, exercises. 1 an the Wee ji z this is Trefollowing isa summary isting ofthe formulas introduced in this topic vats? FUTURE VALUE OF A SINGLE AMOUNT The FY, = PV, (1+7)" “EV, = PV x (FVIF_) have, Puy=RY x (1 +5y"* 0 per Bc a or (Used when there aré m number of times of compounding in a year) yn his CONTINUOUS COMPOUNDING : your FV,=PVxer"c= ath EFFECTIVE ANNUAL RATE EAR chapters © Financial Management ed xi? s(i fee? 7 PY, = PMT X (PVIFA,) (1+) PRESENT VALUE OF PERPETUITY PMT or FUTURE VALUE OF AN ORDINARY ANNUITY FVA = PMT (1+ 1)! + PMT(L ++. + PMT(L +1)" = PMT [(1 + 7) + (14 +. + LE FVA = PMT X (FVIFA,,.) FVA = FUTURE VALUE OF AN ANNUITY DUE FY = pt x (0+ a+r) DETERMINATION OF PERIODIC PAYMENTS, ANNUAL PERCENTAGE RATE OR ANNUAL PERCENTAGE YIELD APY =(L4r)"-1 BSC y cy Cova lesty rf Emery, Finnerty and Stowe (2007), Corporate Financial Management, 3rd edfust Prentice-Hall Horne, James V. (2002), Financial Management and Policy, 12thedn., USA:P Hall. {http://www.utsc.utoronto.ca/~wei/teaching/mgtc03/tvm.pdf] ‘Time Value of Money’ [http://web.utk.edu/~jwachowi/mequiz/me3.html] Ross, Westerfield, Jaffe & Jordan (2008), Modern Financial Management § Boston: McGraw-Hill, “Time Value of Money’ [http://www.morevalue.com/i-reader/ftp/Ch6.pall Time Value of Money Tutorials _{http://wwwfinancescholar.com/l0M timevalueofmoneyl.html)