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time value of money

Summary of tvm

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42 views11 pages

time value of money

Summary of tvm

Uploaded by

gdell5884
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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FINANCIAL

LITERACY
(VAC)
TOPIC:TIME VALUE OF

MONEY

Presented To : Dr. Sanjeev Kumar



Introduction to Time Value of Money

THE CONCEPT :

Time Value of Money is the idea that money available at the present time is worth
more than the same amount in the future due to its potential to earn interest.

KEY PRINCIPLES :

Understanding present value , future value , compounding and discounting are


crucial for applying TVM effectively .

The Concept Of Present Value

DEFINATION : FACTORS :
Present value is influenced by the
Present value is the current worth of a discount rate , time horizon and the
future sum of money or stream of cash flow future cash flow amounts .
, given a specific discount rate .

IMPORTANCE :
APPLICATIONS :
Present value helps determine worth of an
Present value is crucial for evaluating
investment or financial decision today
investments , loams and other financial
enabling enforced choices .
instruments .
 The Concept Of Future Value

DEFINITION : FACTORS :

Future value is the value of an asset Future value is influenced by the


or cash at a future date , given a interest rate , time horizon and the
specific rate of return . initial investment amount .

IMPORTANCE : APPLICTIONS :

Future value helps understand the Future value is crucial for


potential growth of investments and retirement planning , saving goals
long term impact of financial decision and evaluating investment
. opportunities .

Compounding And Discounting
DISCOUNTING :
COMPOUNDING :
The reverse process of calculating the
The process of earning interest on
present value of a future cash flow
interest leading to exponential growth
using a specific discount rate .
of an investment over time .

IMPORTANCE :
IMPLICATIONS :
Understanding compounding and
Compounding can dramatically
discounting is essential for effective
increase the value of long term
financial planning and wealth creation
investments , while discounting allows
.
for informed financial decisions .

Calculating Present Value :

• Identify the future cash flow or


lump sum amount .
STEP 1

• Determine the appropriate


discount rate based on risk and
STEP 2 opportunity cost .

• Calculate the present value using


the formula :
STEP 3 • PV = FV/(1+r)^n

Calculating Future Value :
• Identify the present value or initial
STEP1 investment amount .

• Determine the appropriate interest rate or


STEP 2 rate of return .

• Calculate the fture value using the formula :


STEP 3 • FV = PV*(1+r)^n

Annuities and Perpetuities :
 Applications of Time Value of Money

▪ Investment Evalution -

Analyse the potential return of various investment opportunities .

▪ Loan Structuring -

Determine the appropriate terms and affordability of loans and mortgages .

▪ Retirement Planning -

Forecast future financial needs and saving required for a comfortable retirement .

▪ Capital Budgeting -

Evaluate the viability of capital projects and long term investment .



Conclusion : The Importance of TVM

$1,000 (Initial Investment)

10 % (Annual Interest Rate)

10 (Years)

$2,593 (Future Value) [using formula: FV=PV(1+r)^n]

In conclusion , the time value of money is a fundamental concept that enables informed
financial decision making .

By understanding present value ,future value ,compounding and discounting we can


effectively evaluate investments , manage loans and plan for a secure financial future .

 THANK YOU

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