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Time Value of Money

The document discusses the time value of money concept in finance which recognizes that money has different values at different points in time. It influences aspects like investment appraisal, valuation, and financial decision making. The document also explains how time value of money relates to concepts like future value, present value, discounted cash flow analysis, net present value, internal rate of return, loan repayments, and capital budgeting.

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30 views

Time Value of Money

The document discusses the time value of money concept in finance which recognizes that money has different values at different points in time. It influences aspects like investment appraisal, valuation, and financial decision making. The document also explains how time value of money relates to concepts like future value, present value, discounted cash flow analysis, net present value, internal rate of return, loan repayments, and capital budgeting.

Uploaded by

nevillemukoro
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as XLSX, PDF, TXT or read online on Scribd
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TIME VALUE OF MONEY (TVM)

The Time Value of Money (TVM) is a fundamental concept in finance that recognizes the idea tha
of money has different values at different points in time. This principle is crucial in financial a
influencing various aspects such as investment appraisal, valuation, and financial decision-making.
how the Time Value of Money relates to financial analysis:
1. Future Value (FV) and Present Value (PV):
Future Value (FV): TVM allows analysts to calculate the future worth of a sum of money inv
or saved at a specified interest rate over a certain period.
Present Value (PV): It helps determine the current value of a future sum, considering the imp
discounting based on an interest rate.
2. Discounted Cash Flow (DCF) Analysis:

TVM is a core principle in DCF analysis, which is widely used for business valuation. It inv
discounting future cash flows to their present value to assess the intrinsic value of an investm

3. Net Present Value (NPV) and Internal Rate of Return (IRR):


Net Present Value (NPV): NPV is a technique that evaluates the profitability of an investmen
comparing the present value of expected cash inflows with the present value of outflows.
Internal Rate of Return (IRR): IRR is the discount rate at which the NPV of an investment be
zero. TVM is integral to determining IRR.
4. Loan Repayment and Interest Calculations:
TVM is applied to calculate loan payments, interest rates, and amortization schedules. It help
understanding the cost of borrowing and the timeline for repayment.
5. Capital Budgeting Decisions:
TVM plays a crucial role in capital budgeting decisions by assessing the financial feasibility
long-term investments. It helps determine whether the returns on an investment justify the in
costs.
6. Risk and Uncertainty:
TVM is considered in risk analysis. Future cash flows are often discounted to assess the imp
uncertainty and risk on the present value of expected returns.
7. Opportunity Cost:
TVM is closely tied to opportunity cost. The value of money today can be compared with the
potential returns from alternative investments.
8. Time Horizons in Financial Planning:
TVM aids in setting realistic financial goals and planning for the future. It emphasizes the
importance of considering the timing of cash flows in financial decision-making.
In essence, the Time Value of Money recognizes that a certain amount of money today is worth mor
the same amount in the future due to the earning potential of capital over time. This concept is centra
various financial analyses, helping analysts make informed decisions about investments, loans, and o
financial endeavors.
FINANCIAL FUNCTIONS FIND FV
EMI Equated Monthly Installment PRINCIPAL 6,000,000
PMT Payment INTEREST 15%
RATE Interest Rate PERIODS (YEARS) 6
NPER Number of Periods PMT 0
PV Present Value FV
FV Future Value

Principal Year
10,000 4
30,000 6
40,000 2
50,000 8
230,000 5
90,000 13

FV (ROI) Year
110,000 14
320,000 16
650,000 9
780,000 4
220,000 15
190,000 11
FIND PV
FV (ROI) 20,000,000
INTEREST 15%
PERIODS (YEARS) 6
PMT 0
PV

Interest PMT FV
6% 0
9% 0
12% 0
16% 0
34% 0
27% 0

Interest PMT PV
7% 0
4% 0
15% 0
13% 0
24% 0
19% 0

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