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Time Value of Money

The document discusses the concept of time value of money (TVM), which recognizes that the value of money differs at different points in time. TVM is central to finance and refers to the difference in value between money in the present versus in the future. TVM is based on the ideas that people prefer receiving money now rather than later, and that money can earn interest over time. TVM calculations use compounding to determine future value and discounting to determine present value based on interest rates and time periods.

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Ekta Jaiswal
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355 views

Time Value of Money

The document discusses the concept of time value of money (TVM), which recognizes that the value of money differs at different points in time. TVM is central to finance and refers to the difference in value between money in the present versus in the future. TVM is based on the ideas that people prefer receiving money now rather than later, and that money can earn interest over time. TVM calculations use compounding to determine future value and discounting to determine present value based on interest rates and time periods.

Uploaded by

Ekta Jaiswal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Time Value of

Money
Time Value of Money
Time value of money (TVM) is central to the concept of finance. It
recognizes that the money is different points of time.

The difference in the value of money at present and in future is referred


to as time value of money.
Time Value of Money
• The time value of money (TVM) is the concept that money available at
the present time is worth more than the identical sum in the future
due to its potential earning capacity.

• This core principle of finance holds that provided money can earn
interest, any amount of money is worth more the sooner it is
received. 
Time Value of Money
• Time value of money is based on the idea that people would rather
have money today than in the future.
• Given that money can earn compound interest, it is more valuable in
the present rather than the future.
• The formula for computing time value of money considers the
payment now, the future value, the interest rate, and the time frame.
• The number of compounding periods during each time frame is an
important determinant in the time value of money formula as well.
Reasons
1. Presence of inflation
2. Preference of individuals for current consumption over future
consumption.
3. Investment opportunities that make money grow with time possibly
without taking much risk. (idle money has value too if)
Presence of inflation
• in the value of money with time is due to inflation.
• The prices of goods and services increase with time.
Hence, a lesser quantity of the same goods can be bought in future
than at present.
Compounding and Discounting
Cash flows at different points of time.

• Either the cash flow occurring today has to be converted into its
equivalent at a future date. (COMPOUNDING)
OR
• The cash flow occurring later has to be converted back to its value
today. (DISCOUNTING)
Techniques
I. Compounding Technique

II. Discounting or present value technique


Present Value
Future Value
Finding Future Value
Compounding = applying interest over interest

FV = P * (1 + R)n

FV = Future value

P = Principal amount

R = interest rate

n = No. of years (time)


Sum 1:
Suppose that Rs. 1,000 are placed in the savings account of a bank at
5% interest rate. How much shall it grow at the end of 5 years?
Finding Future Value
Compounding = applying interest over interest

FV = P * CVF(r, t)
Sum 2:
If you deposited Rs. 55,650 in a bank, which was paying a 15% rate of
interest on a 10-year time deposit, how much would the deposit grow
at the end of 10 years?
Finding Present Value
Discounting = reverse of compounding

PV = F
(1 + R)n
Sum 3:
Mr. X is to receive Rs. 5,000 after 5 years from now. His time preference
for money (Rate of interest) is 10% p.a. calculate the present value.
Finding Present Value
Discounting = reverse of compounding

PV = FV * PVF(r, t)
ANNUITY

The maturity value can be calculated by treating each year’s stream as


a separate investment with the 1st year payment being invested for 5
years, 2nd year payment invested for 4 years, and so on (if money
invested for 5 years).
Future Value Annuity

The maturity value can be calculated by treating each year’s stream as


a separate investment with the 1st year payment being invested for 5
years, 2nd year payment invested for 4 years, and so on (if money
invested for 5 years).
Sum 4:
You decide to deposit Rs. 1,000 annually for 5 years at 10% in a bank.
What is the maturity amount at the end of five years?
Sum 5:
Mr. X deposits Rs. 5,000 annually for 5 years at 8% in a bank. What is
the maturity amount at the end of five years?
Present Value Annuity
SUM 6:

Mr. X has to receive Rs. 2,000 per year for 5 years. Calculate the present
value of annuity assuming that he can earn interest on his investment
at 10% p.a.
THANK YOU

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