TIME VALUE OF

MONEY

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 TIME VALUE OF MONEY

• Every Firm And Individual Preferred To Received

The Money Today Than To Receive The Money
Tomorrow
• Because Rupee / Money receive today has higher
value than Money receive in future
• Time Value of Money is the rate of return which an
investor can earn by reinvesting its present money.

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 FUTURE VALUE OF SINGLE
CASH FLOW
Future Values is defined as the value of that amount expected to
be made in some time in future
Fv=PV (1+r)n
Fv= Future value
PV= Present value
R= %Rate of interest and
N= time gap after which FV is to be acertained

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 HOW TO CALCULATE FUTURE
VALUE
 For example Mr. A deposit Rs. 1,000 in a bank for three years with interest at
10% per annum. The Future Value of deposit is
 Here:
 PV= Rs 1,000
 r= 10% or 0.10
 N= 3 (years)

Fv=PV (1+r)n

Fv=1000(1+0.1)3

Rs.
1,331
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 PRESENT VALUE OF SINGLE
CASH FLOW
• Present Value of a future money may be defined as
the value of that money if it is received today.

• For example Present value of Rs. 1,100 recievable

after one year is Rs. 1,000 considering the interest
at 10% per annum which could be earned by
depositing Rs. 1,000 today for one year.

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FORMULA OF PRESENT VALUE
OF SINGLE CASH FLOW

PV = FV/(1+r)n
•WHERE:
• PV = PRESENT VALUE
• FV = FUTURE VALUE
• r = interest Rate / discount rate
• n = Number of periods

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 Example of how to calculate the
Present value of single cash flow
• Calculate the PV of Rs. 1,331 which would be
recievable after 3 years and considering the interest
rate is 10% annually.
• Here : FV= Rs. 1,331
r = 10% or 0.10 & n= 3 years
PV = FV/(1+r)n
1000/
(1+0.10)3

PV= Rs. 1,000

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 Future Value of A Series of Cash
Flows or Ordinary Annuity of Cash
Flows
An Annuity is a Finite Series of Equal cash flows
made at regular intervals
For Example:
A deposit of Rs. 1,000 each year is to be made at the end of each for
next 3 years from today. This may be referred to as annuity of
deposit of Rs. 1,000 for 3 years at 10% compounded annually.
Year 1 Year 2 Year 3
Rs. 1,000 Rs. 1,000 Rs. 1,000 not compounded
Rs. 1100
Rs 1210
Total Rs. 3310
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 Future Value of A Series of Cash
Flows or Annuity of Cash Flows
• The Future Value of an annuity also depends upon
three variables i.e annual amount, the rate of
interest and time period.
• In Ordinary annuity cash flows occur at the end of
each period where as Cash flow of Annuity due
occurs at the beginning of the period.
• FV = Annuity Amount X CVAF(r,n)
• CVAF(Cumulative value of Annuity Factor)

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 Future Value of A Series of Cash
Flows or Annuity of Cash Flows
• For Example: Future Value of annuity of Rs. 1,000 for 3
yeas at 10% may be calculated as follows:
FV = Annuity Amount X CVAF(r,n)
FV= Rs 1,000 xCVAF(10%, 3)
FV= Rs 1,000 X 3.310
FV = Rs. 3310

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 Future Value of A Series of Cash
Flows or Annuity of Cash Flows

Example using Formula

Assume that you deposit Rs. 1,000 at the end of each year for 3 yerars in a
saving account earning 8% compound annual interest. How much money will
you have at the end of three years?

FVA = Annuity Amount (R) (((1+i)^ n)-1)/i

Rs. 1,000 (((1+0.08)^3)-1)/0.08
Rs. 3,246

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 Present values of A Series of Cash
Flows or Annuity of Cash Flows
• A decision taken today may result in a series of future cash
flows of the same amount over a period of number of years.
For example, a service agency offers the following option
for 3-year contract:
I. Pay only Rs. 2500 now and no more payment during next 3
years
II.Pay Rs. 900 each at the end of first, 2nd and 3rd Year from
now. A client having rate of 10% per annum can choose
either option one or two

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 Present values of A Series of Cash
Flows or Annuity of Cash Flows

 Option 1 The payment of Rs. 2500 now is already in terms of present value
therefore it does not require any adjustment
 Option 2 The custromer has to pay an annuity of Rs. 900 for 3 years. This
can be presented as
 PV= Annuity Amount X PVAF(i,n)
 PV= Rs. 900X PVAF(10%, 3)
 PV= Rs. 2,238
 PVA = Annuity Amount (1-(1/(1+i)^n))/i
 PVA= Rs. 900 (1-(1/(1+0.1)^3))/0.1
 Rs. 2238
 Customer will choose option two instead paying 2500 now he will pay
annuity whose present value is Rs. 2238
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 Annuity Due

• In contrast to an ordinary annuity where payment

and receipts occur at the end of the each period
• An Annuity due calls for series of equal payment
occurs at the beginning of each period
• FVADn = Annuity Amount (R) (FVIFA)(1+i)
• FVADn = Rs 1,000 (3.246)(1.08)
• Rs. 3506

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Annuity Due

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 Annuity Due

• Present value for annuity Due

• PVADn = Annuity Amount ( R)(PVIF(i,n) (1+i)
• Rs. 1000 (PVIF8%, 3)(1.08)
• Rs. 2,783

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 Perpetuity

• A perpetuity is an ordinary annuity whose

payments or receipts continue forever.
• For ex Prefrerred Stocks and Bonds
• PVA = annuity Amount (R) /i

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 Amortizing a Loan

• An important use of present value concepts is in

determining the payments required for an
installment type loan.
• The distinguishing feature of this loan is that it is
repaid in equal periodic payments that include both
interest and principal.
• These payment can be made monthly, quarterly,
semiannually and annually

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 Amortizing a Loan

• Installment payment are prevalent in mortgage loan,

auto loan, consumer loan and other business loans.
• Assume you borrow Rs. 22,000 at 12% compound
annual interest to be repaid over next six years.
• PV = Annuity amount (R) (PVIFA12%, 6)
• 22,000 = R (4.111)
• R= 22,000/4.111= Rs. 5351

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Amortizing a Loan

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