INVESTMENT APPRAISAL

TECHNIQUES

INTERST: “money paid for the use of money”

There are two types of interests.

•Simple Interest
•Compound Interest

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 Simple Interest: it is the interest paid only on original
(principal) amount borrowed.
FV= SI = PV+ PV(i)(n) OR
FV= PV[1+(i)(n)]
• SI=simple interest
• P=principal amount or present amount
• i=interest rate
• n=number of time periods interest compound

Compound interest: interest paid on any previous

interest earned as well as on the borrowed (principal)
amount.
FV= CI =PV(1+i)n OR
FV = PV(FVIFi,n)
• FVIFi,n = future value interest factor at i% and n periods

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 Activity 1: Simple interest
You deposit Rs.1000/- in a saving account,
which pays 8% simple interest and you keep it
for 2 years. Calculate the accumulated interest
and principal amount at the end of tenure.

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 Activity 1: Simple interest
You deposit Rs.1000/- in a saving account,
which pays 8% simple interest and you keep it
for 2 years. Calculate the accumulated interest
at the end of tenure.
SI=P + P(i)(n) or P[1+(i)(n)]
SI=1000+1000(0.08)(2) or 1000[1+(0.08)(2)]
SI=1160/-
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Activity 2: Compound interest
You deposit Rs.1000/- in a saving account
paying 8% compound interest and keep it for
2 years. Calculate the accumulated interest at
the end of tenure.

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Activity 2: Compound interest
You deposit Rs.1000/- in a saving account paying 8%
compound interest and keep it for 2 years. Calculate the
accumulated interest at the end of tenure.
FV=P (1+i)n
FV=1000(1+0.08)2 or 1000(1+0.08)(1+0.08)
FV=1166.64/- or

FV = P(FVIFi.n)
FV = 1000(1.166)
FV = 1166/-

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 Semi annual and other
compounding period

FV=PV(1+i/m)mn
FV= Future value
PV= Present value
m= number of time periods interest compounds
n= number of time periods
1 financial year is of 360 days

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 Activity 3: Semi-annual
compounding
You deposit Rs.1000/- in a saving account
paying 8%, compound semi-annually and
keep it for 2 years. Calculate the accumulated
interest and principal amount at the end of
tenure.

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 Activity 3: Semi-annual
compounding
You deposit Rs.1000/- in a saving account paying
8% interest compound semi-annually and keep it for
2 years. Calculate the accumulated interest at the
end of tenure.

FV= P (1+i/m)mn
FV= 1000 (1+0.08/2)2x2
FV= 1169.85

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 Continuous compounding period
Continuous compounded interest means that your
principal is constantly earning interest and the
interest keeps earning on the interest earned on daily
basis!
FV=P (1+i/m)mn
FV = Future value
P= Present value
m= number of time periods interest compounds
n= number of time periods
1 financial year is of 360 days 10
 Activity 4: Continuous
compounding
You deposit Rs.1000/- in a saving account
paying 8% on continuous compounding basis
and keep it for 2 years. Calculate the
accumulated interest and the principal amount
at the end of tenure.

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 Activity 4: Continuous
compounding
You deposit Rs.1000/- in a saving account paying
8% interest on continuous compounding basis and
keep it for 2 years. Calculate the accumulated
interest at the end of tenure.

FV= P (1+i/m)mn
FV= 1000 (1+0.08/360)360x2
FV= 1173.49

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 Effective annual interest rate
The actual rate of interest earned after adjusting the
nominal rate for factors such as the number of
compounding periods per year.
m
Effective annual interest rate = (1+(i/m)) -1
If a saving plan offered a nominal interest rate of
8% compounded quarterly on a one year investment,
the effective annual interest rate would be
Effective annual interest rate = (1+(0.08/4)) 4-1
Effective annual interest rate = 0.0824 or 8.24%13
 Annuities
“A series of equal payments or receipts
occurring over a specified number of
periods”
Ordinary annuity: In ordinary annuity,
payments or receipts occur at the end of
each period.
Annuity due: In annuity due payments or
receipts occur at the beginning of each
period.
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 Activity 5: Ordinary annuity
FVAn = R(1+i)n-1 + R(1+i)n-2……….R(1+i)1+ R(1+i)0

Example: Assume you are receiving Rs. 1000/- a year,

for 3 years at your birthday and you deposit each annual
receipt in a PLS account for 8% compound interest.
How much money you will have at the end of 3 years.

Time line: refer to book

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 Activity 5: Ordinary annuity
FVAn = R(1+i)n-1 + R(1+i)n-2……….R(1+i)1+ R(1+i)0

Example: Assume you are receiving Rs. 1000/- a year, for

3 years at your birthday and you deposit each annual
receipt in a PLS account for 8% compound interest. How
much money you will have at the end of 3 years.
FVAn = 1000(1+0.08)3-1+1000(1+0.08)3-2 +1000(1+0.08)3-3
FVAn = 1166.4+1080+1000
FVAn = Rs. 3246.4/-

Time line: refer to book

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 Activity 6: Annuity due
FVAn = R(1+i)n-0 + R(1+i)n-1……….+ R(1+i)n-n+1

Example: Assume you are receiving Rs. 1000/- a year for 3 years
and you deposit each annual receipt in a PLS account for 8%
compound interest. How much money you will have at the end of 3
years.

For time line refer to book.

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 Activity 6: Annuity due
FVAn = R(1+i)n-0 + R(1+i)n-1……….+ R(1+i)n-n+1

Example: Assume you are receiving Rs. 1000/- a year for 3 years
and you deposit each annual receipt in a PLS account for 8%
compound interest. How much money you will have at the end of 3
years.

FVAn = 1000(1+0.08)3+1000(1+0.08)2+1000(1+0.08)1
FVAn = 1259.7+1166.4+1080
FVAn = Rs. 3506.1/-

For time line refer to book.

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 Time Value of Money 
• The time value of money (TVM) is the
idea that the money available at present is
worth more than the same amount in the
future due to its potential earning capacity.
This core principle holds the idea that the
provided money have an opportunity to
earn interest.

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