Time Value of Money

CA Mayank Kothari

A. Simple Interest
B. Compound Interest I = Interest Amount , P = Principal Amount , r = Rate of Interest
C. Effective Rate of Interest t = period of investment , n= No. of Compounding in a year
D. Present Value & Future Value A = Annuity , PV = Present Value , FV= Future Value
E. Present Value of Annuity P = Perpetuity = Present Value of Perpetual Cash Flows
F. Perpetuity PVF = Present Value Factor, PVAF / PVIF = Present Value Annuity Factor

A. Simple Interest

0 I
Simple Interest
=Pxrxt
= ₹100 x 0.10 x 1
100 J 10 pa 51 10
= ₹10

2 5 Simple Interest
I 3 4
=Pxrxt
= ₹100 x 0.10 x 5
100 J 10 SII 50 = ₹50
pa

B. Compound Amount & Compound Interest

0 I

100 J 10 pa CA P 1 CI
1001 10
110
 CA Final SFM CA Mayank Kothari
Annual Compounding
I 2 3 4 5
CA = P(1+r/n)tin
100 T 10 =100(1+0.10/1)
pa CA p f CI
=100 x 1.6105
O =161.05
Il
12to
1331
14.64

Seni Annual Compounding

2 3 4 5
I f l I I CA = P(1+r/2)th
=100(1+0.10/2)5 2
100 J 10 pa CA p f CI
I =100 x 1.6289
2 =162.89
3
4
5
6

8
g
lo

Quarterly Compounding Monthly Compounding Daily Compounding

CA = P(1+r/n)tn CA = P(1+r/n)tn CA = P(1+r/n)tn

=100(1+0.10/4) 5 4 =100(1+0.10/12) 5 12 =100(1+0.10/365)5365
=100 x 1.025 20 =100 x 1.00833Go =100 x 1.0002741825
= 100 x 1.6386 =100 x 1.645 =100 x 1.6487
=163.86 =164.50 =164.87
 CA Final SFM CA Mayank Kothari
C. Effective Rate of Interest
Normal Rate p.a. Effective Rate p.a.
(Annual Compounding)

10% p.a. 10% p.a.

F 100 8 101 N Annual CA 110
Annual Annual
Compounding Compounding

17 100 CA = P(1+r/n)tn 10% p.a. (110.25-100)/100 = 10.25% p.a.

8 101 n Semiannual
=100(1+0.10/2) 1 2 Semi-Annual Annual
=100 x 1.05 Z Compounding Compounding

= 100 x 1.1025
=₹110.25

l I i

F 100 8 101 A
Quarterly
CA = P(1+r/n)th 10% p.a. (110.38-100)/100 = 10.38% p.a.
=100(1+0.10/4) 1 4 Quarterly Annual
Compounding Compounding
=100 x 1.0254
= 100 x 1.1038
=₹110.38

l I i

CA = P(1+r/n)th 10% p.a. (110.43-100)/100 = 10.43% p.a.

F too 8 101 N Monthly
=100(1+0.10/12) 1 12 Monthly Annual

=100 x 1.008312 Compounding Compounding

= 100 x 1.1043
=₹110.43

Compounding Rate = Effective Rate Calculation = (1+r/n)n - 1

Annual 10% p.a. = 10% p.a. (1+0.10/1) - 1 = 0.10 i.e. 10%p.a.

Semi-Annual 10% p.a. = 10.25% p.a. (1+0.10/2) - 1 = 0.1025 i.e. 10.25%p.a.

Quarterly 10% p.a. = 10.38% p.a. (1+0.10/4) - 1 = 0.1038 i.e. 10.38%p.a.

Monthly 10% p.a. = 10.43% p.a. (1+0.10/12) - 1 = 0.1043 i.e. 10.43%p.a.

 CA Final SFM CA Mayank Kothari

D. Present Value & Future Value

CA = P(1+r/n)ht 110 = 100(1+0.10/1)

17 100 8 101 CA 110 In terms of Present & Future Value For Annual Compounding & 1 year
FV = PV (1+r/n)nt 110 = 100 x 1.1

1
PV = FV/(1+r/n) Ev nt
100 = 110/1.1
Present Value Future Value ntPV = FV x 1/(1+r/n) 100 = 110 x 1/1.1 MIF
PV = FV x PVF 100 = 110 x 0.909

1 Year = 1/(1+0.10) i = 0.909 4 Year = 1/(1+0.10)4= 0.683

PUF 2 Year = 1/(1+0.10)2 = 0.826 5 Year = 1/(1+0.10)5 = 0.621

3 Year = 1/(1+0.10)3 = 0.751

E. Present Value of Annuity Annuity = ₹100, t= 5 years , r =10% p.a.

I 2 3 4 5

100 100 100 100 100

0.909
90.90
82.60 0.826

75.10 0.751

68.30 0.683
0.751
62.10
₹379

Or

PV of Annuity = Annuity x PVAF 10%, 5 Years

= 100 x 3.79 1/1.10
= ₹379 = M+
= M+
= M+
= M+
= M+
MRC (MemoryReCall)
 CA Final SFM CA Mayank Kothari
F. Perpetuity Annuity = ₹100, t= Perpetual , r =10% p.a.

I 2 3 4 5

100 100 100 100 100 100 100 100

I 2 3 4 5

100 100 100 100 100 100 100 100

CF1
P0=
rate
P1= CF2
rate

P2= CF3
rate
CF4
P3=
rate
P0 = CF1 /rate CF5
P4= rate
= 100/ 0.10

P5= CF6
=₹1000
rate
P0 = (CF1 +P1) x PVF1
= (100+1000) x 0.909
= ₹999.90

P0 = (CF1 x PVF1) + [(CF2 +P2) x PVF2]

= (100 x 0.909) +(100+1000) x 0.826
= 90.90 + 908.60
=₹999.50

P0 = (CF1 x PVF1) + (CF2 x PVF2)+ [(CF3 +P3) x PVF3]

= (100 x 0.909) + (100+0.826) +(100+1000) x 0.751
= 90.90 +82.60 + 826.10
=₹999.60

P0 = (CF1 x PVF1) + (CF2 x PVF2)+ (CF3 x PVF3)+ [(CF4 +P4) x PVF4]

= (100 x 0.909) + (100+0.826) + (100+0.751) + (100+1000) x 0.683
= 90.90 +82.60+75.10 + 751.30
=₹999.90

P0 = (CF1 x PVF1) + (CF2 x PVF2)+ (CF3 x PVF3)+ (CF4 x PVF4) + [(CF5 +P5) x PVF5]
= (100 x 0.909) + (100+0.826) + (100+0.751) + (100 x 0.683) + (100+1000) x 0.621
= 90.90 +82.60+75.10 + +68.30+ 683.10
=₹1000