Professional Documents
Culture Documents
Emergency Fund-TVM
Emergency Fund-TVM
Emergency Fund,
Time Value of Money
and its Application
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
Emergency Fund
• In life you should expect the unexpected,
and this is why you need an emergency
fund. The best you can do is to prepare for
emergencies that require access to
additional money and having an emergency
fund is the ideal solution.
Chapter # 2
Emergency Fund
Chapter # 3
Where to Save The Emergency
Fund
Three Criterias:
Easy Access
Liquidity
Safety (low risk)
Chapter # 4
Emergency Fund
Chapter # 5
Opening Case
You have won lottery and are being asked to
choose between two alternatives:
1. Receive IDR 400 million and will be paid
right away (NOW)
2. Receive IDR 55 million every year for the
next ten year
Assume interest rate at 5% a year.
Time Value of Money
FV = $5,000 x (1+
5%) 6
FV = $5,000 x 1.34
FV = $6,700
Calculating the Future Value of a
Single Sum
Tables
Find Future Value Factor for 6 years and
5% (in Table B1)
FV = PV x Factor i,n
FV = PV x FVIF 5%,6years
FV = $5000 x 1.340 = $6,700
Calculating the Future Value of
an Annuity
Example:
Number of years = 72
to double money Annual compound
interest rate
Present Value
Amount needed today to invest at a
specific interest rate over a given time
period to reach desired future amount
“Discounting” – reverse of
compounding
working from future value
back to present value
Calculating the Present Value of
a Single Sum
Example:
You wish to accumulate a retirement fund
of $300,000 in 25 years. If you can invest
at 5%, what single lump-sum deposit
must you make today in order to achieve
your goal?
Calculating the Present Value
of a Single Sum
• Using Formula:
PV = $300,000
(1+ 5%) 25
PV = $88,590.83
Calculating the Present Value
of a Single Sum
Tables
Find Present Value Factor for 25 years and
5% (Table B2)
PV = FV x Factor i,n
PV = FV x PVIF 5%,25 years