OF MON EY

I M E VA LU E
T

• Presented By
– Mayuresh Ganu
– Jitendra Pareek
– Jithu N Kurias
Time Value of Money

p os e :
• Pur s ti n g
o r a d j u
e t h o d f is io n s .
n th e m i a l d ec
p l ai i n an c
To ex v a l ue i n F
ti m e
the
 o rt a nt ?
m e Im p
hy i s Ti
W
o u t h e
l o w s y
• Al n i t y to
p p o r tu
o
t p o n e
po s t i o n a n d
u m p
c on s E R E S T .
IN T
e ar n
 e fo r m o n ey ?
hy Ti me Va lu
o r p o s s e s s io n
s p r e fe r en c e f
iv id u a l r
• An ind o f c a s h n o w , r a t h e
i v e n a m o u n t e tim e,
of a g a t s o m e f u tu r
s a m e a m o u n t
than the R E F E R E N C E F O R
l le d “ T IM E P
is ca
M O N E Y ” .
b e a fo l l o w s :
• Reaso n s m a y
–U n c e r ta in ty
co n s u m p t io n
e n c e fo r
–Prefer e s
p p o r t un i t i
tment O
 d V a l u e
m p ou n
Co e
e fu t u r
d V a l u
n e
d i n g t h
r
o m p ou
c ens s o f f i
e ce i p t ) o
C
•Th e p ro e n t (o r r
when
f a p a y m ce i p ts )
val u e o t s (o r re n d
p a y m en o m p o u
o f o f C
series h e co n c e p t
p o u n d i n g.
l y in g t s C o m
app k n o w n a
e r e s t i s
Int
 L u m p S u m
v a l u e o f a L u mp S u m
C om p o u nd va l u e o f a
l a t i n g p o u n d
CaallccuulatingCom
C o f 1
nd
st yr,

a t th e e
e v a lu e
• Fu tur nd yr,
i) en d o f 2
F1=P(1+ a t the
lu e
Fu ture va r,
i)^2 of n th y
=P( 1 +
e e n d
F2
a lu e a t th
u t u re v
• F rio d ,
Fn=P(1+
i )^ n
e p e r p e
r e st r a t y o ff
i= in te or e p a
where, f p e r io d s b e f
u m b er o
n= n
 Annuity
An annuity
represents a
serial of equal
payments(or
receipts)
occuring over a
specified number
of equidistant
periods.
TYPES
TYPES OF
OF ANNUITIES
ANNUITIES
c e ip t s o cc u r
y m e n t s o r r e o cc u r
nn u i ty : Pa s o r r e c e ip t s
r y A
• Ordinaary Annuitayc:hPpaeyrm e n. t
n e i o d
• O r dhi e E N D o f e r i o d . s o c c u r a t
at t N D o f e a c h p ts or receipt
e n c u r a t
t th e E
a nuity Due : P a y m r e c e i p t s o c
• An ty Due : PaGym e n t s o
h rp e r io d .
n u i I N o f e a c o d .
• A n E G IN N a c h p e r i
the B GINNING of e
the BE
lculating Compound value of Annuity

l a - 1 ] / i
r m u )^ n }
• Fo (1 + i
A [ { c to r
Fn= , a nd a l ue fa
u i t y n d v
a n n po u
e A = c o m
r =
whe ^ n -1 } / i ]
e .1
(1 + i) o f R
[{ u i t y
a n n
n
for a
 Sinking Fund

sc r
c e
r a
e t
a e
t d
e d o u
o t
u o
t f
o ff i
f x
i e
x d
e d
• •TThheefufunnddwwhhicichhisi aa
a
e c
a h
c hy e
y a
e r
a rt o
to a ac c u
c umm u l
u al t
a e
t et ot o
ppa y
a m
y me n
e t
n s
t se
r ra as p
s e
p c
e i
c f
i ie
f d
ie d ppe r
e i
r o
io d d isis
fufututureresusummaaftfete
ccaallleleddSSI N
I NK KI N
I NG G F FU UN N D D . .
e n
e e
n r
e a
r ll
a y
ll yc r
c er a
e te
a teS I
S NI N K K I N
I NGG
•
• CC o m
o m ppaan i
n e
i s
e sgg
e eb o
b on d
n s
d s o n
o nmm a t
a ut r
u irty
it .
y .
FFUUNNDDSStotoreretitrir
Continued… r t h
oor the e
i ty f
uuity f D
e a n n
la te t h e a n n F U N D
c lc u e t
aalculat INKIING Fh N G U N
s e d t o
o c d S K
t r u t
or used is caalled l le S I N
h e f a c
c to u m c
 T e f a r e s m i s
 Thiven ffuuttuure suF). 1 . 0 u n d
ggiven R(SFF). – a n d 1 . 0 o m p o u n d
C T O R ( F
S tween – and f the C o m p o
A
FACT O s b e e e n a l o t he C
F r a n ggees betw eciprooccal of .
S FF r a n t h e recipr VAF).
 SFFs equaall ttoo theFractorr((C C V A F )
 i
IItt is equ nnuittyy Fact o o r
 al u e A n n u i A F ,i )
n i ) or
V
Va l u e A
A ( C V
V A F n ,
]
 F A
= V = ( C ^ 1 n ]} - 1
 F V /( 1+ i )
) ^ n} -
= F[{ i
i /( 1+ i
 A = F[{
 A
 PRESENT VALUE
PRESENT VALUE
i n f l o w o r
u tu r e c a s
i hflow or
n
U E o f a
u tfure cash i s of
E NVTALUE V A L o f a f c a h t h
sthat is o a t f
h e P R E SN T f c u rr e n
c at s h , t o a
 T E S E u n t o r r e n t a k e r
 The PtR f l o w i s et h
a e
m ao m u ot of cu
n t o t h d e
eecision mc i s io n a mk e r, t o a
i d a t a
o u i s t h l i t y, d r p a a
outflowivalent sdierasibrialbitiy, to theto be reeicveeidveodr opaid at
eq
i vualent de n t o f c a st h be rec
o
equ cified aom u o
n uof cash
t r e
s p e e d a m a
oaffuture f u t u
specifiTURE DTA E T . E .
r e s n t
evalue ov a l u ef
F U E D A in i n g p e n t l l ed
FUTUR ocess ofetdeerm terim n i n g p r e s
p a y m e s t s i
nis calle s c a d
 T h r
eropcess of d o f fu t r e
upayme n t
p
 The yment oarsaersieers of futu ie s r e
p a e n t o r . n t in g cha sh
paym COUNIN T IGN. G f o r d i s c n u
oting cas
D IS N T r a t e u sefdor disco u
U
DISCO mpounndtienrteesrterate useNTINGARTA s t d T E.
e c o n d i O U G R E .
 Te hc o m p o u t h e D I C
SOUNTI N
T h s i s c a l e d
l the DIS C
f w
los is call e d
fl o w
 Calculation of Present Value
Calculation of Present Value

 Formula to be emplo
yed to calculate
 Fporremseunlat V
toalu
beeeom fpalLoyuem
dptoScuamlcu
: late
presenPt=VFanlu [(1e+oi)f^a-nL
] ump Su
FoPr=mula to be emplo m:
Fn[(1+i)^-n] yed to calculate present
Fvoarm
lue of an Annuity:
ula to be employed to calc
P = A[{(1 + i)^ ulate present
value of an Ann}-n 1]/
uity:[i(1+i)^n]
P=A[{(1+i)^n}-1]/[i(1+i)^
n]
 Annuity Due
Annuity Due

n t s s t a rt i n g a t t h e
f ix e d p a y m e e
• A series of ix e d p a y m feonr tas s s
p t a
e r
c t
i i
fni g
e d a t t h
• A s e
i r
n i
g e s
o o
f f
e afc h p e ri o d fi e d
begi n n p e ri o d fo rN aU s Ip Te c
Y i D U E .
b e g i n n i n g
e roiof desai h
cs called A N E .
nu m b e r o f p le d A N N U I T Y D U
i o d s i s c a l
number of per
lculating CompoundValue
ulating Compound ValueofofAnnuity
AnnuityDue
Due

om p o u n d
f o r t h e c
e m p l o y e d
a to b e
 Formul n u it y d u e i s :
o f a n i)
value )( 1 +
Fn = A ( C V VAFn,
A i
Va l ue o f
e P r e s en t
c a lc u l a t
la t o
Formu e :
t y D u
Annui )( 1+ i)
( P V A F n ,i
P=A
MultiPeriod Compounding
• The interest rate is usually specified on an
annual basis in a loan agreement or security,
and is known as NOMINAL INTEREST
RATE(NIR).
• If compounding is done more than once a year,
the actual rate of interest paid is called
EFFECTIVE
om p u t inINTEREST
g EI R : RATE(EIR).
Formula for c 1
{ [ 1 + i /m ] ^ n * m } -
EIR= ra t e o f i n t ere st,
i= a n n u a l n omi n a l
wh ere
n=no.of years, a r i .e . i f a n n ua l
.o f c o m p o u nd i n g / ye
m=no m p = 1 2 .
o n t h ly c o
comp.,m=1 then m
Net Present Value(NPV)
ff e re n c e
is t h e d i
e c i s i o n o w s a n d
a n c ia l d a s h i n f l
f a f i n u e o f c
• NPV o he Present Val utflows.
t w e e n t c a s h o
b e a l u e o f
r e se n t V
the P
General Formula to calculate NPV :
NPV=∑t=1 to n{At/(1+k)^t}-C0
Where At=cash inflow in period,
C0=cash outflow,
k=opportunity cost
t=time period
 u. .
an k Yo
Th