TIME VALUE OF MONEY

CONTENTS:

• DEFINITION
• INTRODUCTION
• SIMPLE INTEREST
• COMPOUND INTEREST
• FUTURE VALUE
• PRESENT VALUE
• ANNUITY
• PERPETUITY
Definition:
The time value of money (TVM) is the concept  that a sum of money has
greater value now than it will in the future due to its earnings potential.
e.g.
If you invest $100 (the present value) for 1 year at a 5% interest rate
(the discount rate), then at the end of the year, you will have $105 (the
future value). So, according to this example, $100 today is worth $105 a
year from today.
THE ROLE OF TIME VALUE IN
FINANCE
• The time value of money refers to the observation that it is better to receive
money sooner than later. Money that you have in hand today can be invested to
earn a positive rate of return, producing more money tomorrow. For that reason,
a dollar today is worth more than a dollar in the future.
TECHNIQUES OF TIME VALUE OF
MONEY
• Simple Interest
• Compound Interest
• Compounding/Future value
• Discounting/ Present value
 SIMPLE INTEREST
Simple interest is when the interest received or paid is based only on the amount of money that
was initially invested. Therefore, the interest earned each year will be the same
Formula of SI is SI = P0(i)(n)
simple interest= original amount borrowed (lent) at time period
i = interest rate per time period
n = number of time period

For example,
assume that you deposit $100 in a savings account paying 8 percent simple interest and keep it
there for 10 years. At the end of 10 years, the amount of interest accumulated is determined as
follows:
$80 = $100(0.08)(10)
COMPOUND INTEREST & FUTURE
VALUE
• It is the interest that is received on the original amount as well as on any interest
earned but not withdrawn during earlier period.

Future value (FV) is the value of a current asset at a future date based on an
assumed rate of growth. The future value is important to investors and financial
planners, as they use it to estimate how much an investment made today will be
worth in the future.
For example, if you invest $1,000 in a savings account today at a 2% annual interest
rate, it will be worth $1,020 at the end of one year. Therefore, its future value is
$1,020.
 PRESENT VALUE
present value is the concept that states an amount of money today is worth more
than that same amount in the future. In other words, money received in the future
is not worth as much as an equal amount received today.
ANNUITY: it is a series of payments that are either paid to you or paid
from you. Annuity can be cash flow such as monthly rent payment or car
payment or they can be money received
• TYPES OF ANNUITY:
• ORDINARY ANNUITY: It is the type of payment that is paid or received at the
end of the period.
• ANNUITY DUE: It is the type of payment that is paid or received at the
beginning of the period.
PERPETUITY
• It is a fixed cash flow received over an infinite number of periods.
For example: if someone received $1000 per month until they died, that would be
perpetuity.
Formula of present value of perpetuity
PV = CF/r