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First Session

This document provides an introduction and overview of time value of money concepts including future value, present value, annuities, and perpetuities. It includes examples and quick checks to demonstrate calculating future and present value for single amounts as well as annuities under different interest rates and time periods. The key takeaways are that future value increases as the interest rate or time period increases, while present value decreases as the interest rate or time period increases. Annuities represent a stream of constant cash flows over a fixed number of periods.

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Kanishka Kaur
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38 views

First Session

This document provides an introduction and overview of time value of money concepts including future value, present value, annuities, and perpetuities. It includes examples and quick checks to demonstrate calculating future and present value for single amounts as well as annuities under different interest rates and time periods. The key takeaways are that future value increases as the interest rate or time period increases, while present value decreases as the interest rate or time period increases. Annuities represent a stream of constant cash flows over a fixed number of periods.

Uploaded by

Kanishka Kaur
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Introduction to Financial

Management

Time Value of Money

Agenda
Future Value: Single payment

Future Value: Annuities


Present Value: Single payment
Present Value: Annuities
Present Value: Growing Annuities
Present Value: Perpetuities
Present Value: Growing Perpetuities

Quick Check: Future Value


What are the future values of investing Rs. 100 at 10% for 50 years
versus 100 years
FV= 13,78,061.23 (n= 100)
FV= 11739.08 (n=50)

Power of compounding!!!!!!
4

Quick Check: Future Value


What are the future values of investing Rs. 100 at 10% versus 5% for
100 years
FV= 13,78,061.23 (r= 10%)
FV= 13150.13 (r=5%)

Power of compounding!!!!!!
5

FVdifferent
rates
and
time
periods
Interest rate, time period and FV
Amount

100

Time

0%
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

5%
105.00
110.25
115.76
121.55
127.63
134.01
140.71
147.75
155.13
162.89
171.03
179.59
188.56
197.99
207.89
218.29
229.20
240.66
252.70
265.33
278.60
292.53
307.15
322.51
338.64

10%
110.00
121.00
133.10
146.41
161.05
177.16
194.87
214.36
235.79
259.37
285.31
313.84
345.23
379.75
417.72
459.50
505.45
555.99
611.59
672.75
740.02
814.03
895.43
984.97
1,083.47

15%
115.00
132.25
152.09
174.90
201.14
231.31
266.00
305.90
351.79
404.56
465.24
535.03
615.28
707.57
813.71
935.76
1,076.13
1,237.55
1,423.18
1,636.65
1,882.15
2,164.47
2,489.15
2,862.52
3,291.90

20%
120.00
144.00
172.80
207.36
248.83
298.60
358.32
429.98
515.98
619.17
743.01
891.61
1,069.93
1,283.92
1,540.70
1,848.84
2,218.61
2,662.33
3,194.80
3,833.76
4,600.51
5,520.61
6,624.74
7,949.68
9,539.62

1000
900
800
700
600
500
400
300
200
100
0
1

3
0%

9
5%

11

13
10%

15

17
15%

19

21

23

25

20%

As t increases FV increases
As r increases FV increases
6

Present value
What is the present value of receiving Rs. 110 one year from now if
interest rate is 10%?
PV= FV (1+r)t
FV=110, n=1, r=10%
FV= 110 (1+0.10)1
FV= 100 (1.10)1
FV= 100

Quick Check: Present value


You will inherit $121,000 two years from now. What is the value of
that sum today if interest rate is 10%?
PV= FV (1+r)t
FV=121,000 n=2, r=10%
FV= 121,000 (1+0.10)2
FV= 121,000 (1.10)2
FV=$ 100,000

PVdifferent
rates
and
time
periods
Interest rate, time period and PV
Amount

100

Time

0%
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

5%
95.24
90.70
86.38
82.27
78.35
74.62
71.07
67.68
64.46
61.39
58.47
55.68
53.03
50.51
48.10
45.81
43.63
41.55
39.57
37.69
35.89
34.18
32.56
31.01
29.53

10%
90.91
82.64
75.13
68.30
62.09
56.45
51.32
46.65
42.41
38.55
35.05
31.86
28.97
26.33
23.94
21.76
19.78
17.99
16.35
14.86
13.51
12.28
11.17
10.15
9.23

15%
86.96
75.61
65.75
57.18
49.72
43.23
37.59
32.69
28.43
24.72
21.49
18.69
16.25
14.13
12.29
10.69
9.29
8.08
7.03
6.11
5.31
4.62
4.02
3.49
3.04

20%
83.33
69.44
57.87
48.23
40.19
33.49
27.91
23.26
19.38
16.15
13.46
11.22
9.35
7.79
6.49
5.41
4.51
3.76
3.13
2.61
2.17
1.81
1.51
1.26
1.05

100
90
80
70
60
50
40
30
20
10
0
1 2 3

4 5 6

0%

7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
5%

10%

15%

20%

As t increases PV decreases
As r increases PV decreases
9

PV & FV
To move cash flow forward compound it
To compound cash flows, multiply the amount by
(1 + r)n where r is the periodic interest rate and n is
the number of compounding periods
To move cash flow backward discount it
To discount cash flows, divide the amount by
(1 + r)n where r and n are as defined previously

10

Annuity
Annuity - A stream of constant cash flows that lasts for a fixed number
of periods

11

Future value: Annuities


Future Value of an Annuity

Where
P is the Present Value

R is the percentage rate of compound interest


n is the total number of years

12

Quick check: Annuity future value


What will be the value of your portfolio at retirement if you deposit
Rs. 10,000 every year in a pension fund. You plan to retire in 40 years
and expect to earn a rate of return of 8% on the portfolio.

13

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