DISCOUNTING/ PRESENT

VALUE
BY SIMPY BANSAL
 • Discounting is the opposite of compounding

• In compounding, the money invested today appreciates in

value, because the compound interest is earned, but in
discounting, the money is received at some future
date and will be worth less because the compound interest

MEANING is lost during the period

• The process of reducing future income payments to their

present value is known as discounting

• Present value of some future rupees will always be lower

• The interest foregone is the cost to the investor and the

future expected money must be adjusted for this cost
 DISCOUNTING

Uneven
Single cash
multiple Annuity
flow
flows
SINGLE FLOW

PV = FV/ (1+r)t
‘r’ refers to required rate of return and
‘t’refers to the time period
1/ (1+r)t = PVIF factor
PV = FV x PVF factor
QUESTION

• Rs. 1080 is receivable by Naresh at the end of one year from now and the
expected rate of interest which he can earn on his investment is 8% p.a. then
find the PV.
• Find Present Value of Rs.80,000 to be received after five years when required
rate of return is 10%.
UNEVEN MULTIPLE Year Cash
flow
FLOWS
1 1000
• Aman makes an investment in a
mutual fund which promises
2 2000
following cash flows for five years.
The discount rate is 10%. Find the
present value. 3 2000

4 3000

5 3000
ANNUITY/ SERIES OF EQUAL FUTURE CASH
FLOWS
QUESTIONS

 Mr. X wishes to determine the present value of the annuity consisting of cash inflows of Rs. 1000
per year for 5 years. The rate of interest he can earn from his investment is 10%.

A loan of Rs. 50,000 is to be repaid in equal annual installments of Rs.14,000. The loan carries a 6%
interest rate. How many payments are required to repay this loan?

Assume that a Rs.20,00,000 plant expansion is to be financed as follows : the firm makes a 15% down
payment and borrows the remainder at 9% interest rate. The loan is to be repaid in 8 equal annual
installments beginning 4 years from now. What is the size of the required annual loan payments.
QUESTIONS

• A 10- year savings annuity of Rs. 2,000 per year is beginning at the end of
current year. The payment of retirement annuity is to begin 16 years from
now (the 1st payment is to be received at the end of year 16) and will
continue to provide a 20-year payment annuity. if this plan is arranged
through a savings bank that pays interest @ 7 % per year on the deposited
funds, what is the size of the yearly retirement annuity that will result.
QUESTIONS

• An investor deposits a sum of Rs. 1,00,000 in a bank account on which

interest is credited at 10% per annum. How much amount can be withdrawn
annually for a period of 15 years?
• What is the minimum amount which a person should be ready to accept
today from a debtor who otherwise has to pay a sum of Rs. 5000 today, Rs.
6000, Rs. 8000, Rs. 9000 and Rs. 10000 at the end of year
1,2,3,4 respectively from today. The rate of interest may be take an ad 14%.
QUESTIONS

• Mr. X borrows Rs. 1,00,000 at 8% compounded annually. Equal annual

installments are to be made for 6 years. However, at the time of the fourth
year, the individual elects to pay off the loan. How much should be paid?
• 10 years from now Mr. X will start receiving a pension of Rs. 3,000 a year.
The payment will continue for 16 years. How much is the pension worth
now, if his interest is 10%?
THANK YOU