Financial

Analysis and
Decisions
Karan Vij

Time Value of Money

Thetime

value

money(TVM)

is

of

the

idea

thatmoneyavailable at the
present timeis worth more
than the same amount in
the

future

due

to

its

potential earning capacity.

Time for Critical

Thinking

 If you know that you are spending

10,000Rs today (2016) in a business.
For first 2 years (2017 and 2018),
sales of the business happened but
there was no profit and no loss.
At the end of third year (2020), you
will make a profit of 12,000Rs.

Will You Invest 10,000Rs today!

Explanation of Calculating Present

Value - Discounting

Explanation of Calculating Future

Value - Compounding

Case # 1
Madura Garments can buy a machine (life
of 4 years) which they can buy in 50,000
rupees in the beginning of 2016. However
at the end of 2016, the company will make
15,000 exclusively because of that
machinery. Likewise at the end of following
3 years it will make 20,000Rs, 10,000Rs
and 27,500Rs lakhs respectively. Decide
through
different
capital
budgeting
decisions whether Madura should accept or
reject.

Payback Period Method

Thepayback periodis the number
of months or years it takes to return
the initial investment.

Net present Value

Net Present Value (NPV) is the
difference between the present value
of cash inflows and the present value
of cash outflows.

Rule for NPV

NPV > 0, Accept
NPV < 0 Reject

Internal Rate of Return

Internal rate of return(IRR) is the
interestrateat which the net
present value of all the cash flows
(both positive and negative) from a
project or investment equal zero.

Discounted Payback Period

A discountedpayback periodgives the

number of years it takes to break even

from undertaking the initial expenditure,
by

discounting

futurecash

flowsand

recognizing thetime value of money.

Rule of IRR
IRR > Cost of Capital, Accept
IRR < Cost of Capital, Reject