Presentation

On
Time value of Money

By- Priyanka rani Suhil

 Time Value of Money
• The value of a sum of money received today is more than its value received after
some time.
• The value of a unit of money is different in different time periods.
 Techniques

Two methods to calculate the time value of money

• Compounding Technique
• Discounting Technique
 Compounding Technique/Future Value Technique

• The method used to determine the future value of present investment is

known as Compounding.
• If we invest some money today, what will be the amount we get at a
future date.
• Formula
FV = PV(1 + r/f)fn
Where,
FV = Future Value
PV = Present Value
f = Number of times interest is calculate per year
f = 1 for yearly
f = 2 for half yearly
f = 4 for quarterly
f = 12 for monthly
r = Rate of interest
So, if rate is 10% Then r = 10/100 = 0.1
n = Number of years
 Example
• Let's say we have the same amount $10,000 today and we want
to find the future value if the amount is invested for 10 years at
10% interest rate compounded half yearly.
 Solution

We have
PV = 10000
r = 10% = 10/100 = 0.1
f = 2 (as we are compounding half yearly)
r/f = 0.1/2 = 0.05
n = 10
fn = 2x10 = 20
So, future value FV = PV(1 + r/f)fn
= 10000(1 + 0.05)20
= 26532.98
 Discounting Technique/Present Value Technique
• The method used to determine the present value of future cash flows is
known as Discounting
• What should be the amount we need to invest today, to get a specific
amount in future.
Formula:-
PV = FV/(1 + r/f)fn

Where, FV = Future Value

PV = Present Value
f = Number of times interest is calculated per year
f = 1 for yearly
f = 2 for half yearly
f = 4 for quarterly
f = 12 for monthly
r = Discount rate So, if rate is 10% Then r = 10/100 = 0.1
n = Number of years
 Example
• Let's calculate the present value if we are told that the discount
rate is 10% and future value 10 years from now is $50,000.
 Solution

We have
FV = 50000
r = 10% = 10/100 = 0.1
n = 10
F=1
So, present value will be PV = FV/(1+r)n
= 50000/(1+0.1)10
= 19277.16
 Reasons for Time Value of Money
• Investment Opportunities: Money has the potential to grow over a
period of time because it can be invested somewhere. For example, if
Rs. 1000 can be invested in a fixed deposit for one year at 7% p.a., the
money will grow to Rs, Rs. 1070 at the end of one year. Therefore,
given the choice of Rs. 1000 now or the same amount in one year’s
time, it is always preferable to take Rs. 1000 now.
• Inflation: Inflation is the fall in the purchasing power of money. It
makes money cheaper and the goods and services costlier. Suppose you
can buy 1 kg of rice with Rs. 50 today. If the inflation rate is 10%, You
need Rs. 55 to buy 1 kg of rice a year from now.
• Risk: Money received now is certain, whereas money tomorrow is less
certain. This ’bird in the hand’ principle is extremely important in
investment appraisals.
• Personal consumption preference: Many people have a strong
preference for immediate rather than delayed consumption. For a hungry
man, promise of a meals next month means nothing.
Importance of TWM
Thank you