Overview of Time Value of Money
Overview of Time Value of Money
Overview of Time Value of Money
Time Value
of
Money
Time Value of Money
• Time value of money means that the value of money is different in
different time periods. The value of money received today is more
than the value of same amount receivable at some other time in future.
• The difference in the value of money today and tomorrow is referred
as time value of money.
• Therefore, given a choice of receiving a sum of money today or in the
future, a rational person will always choose to receive the money now
as it has more value today than in the future.
I m×n
CVn = P0 1+
m
CVn= Po(1+i/4)4n
CVn = Po (1+i/12)12n
CVn= Po(1+i/365)365n
Dr. Ankit Jain 12
Time Line
• When cash flows occur at different points of time, it is easier to deal
with them using a time line.
• A time line shows the timing and the amount of each cash flow in a
cash flow stream.
Q.16.What annual interest rate would you need in order to have an ordinary annuity of Rs
7,500 per year accumulate to Rs 2,79,600 in 15 years? (12%)
Q.17.What annual interest rate is implied if you lend someone Rs 1,850 and are repaid Rs
2,078.66 in two years? (6%)
Q.18.Mr A deposits at the end of each year Rs.2,000,3,000,4,000,5,000 and 6,000 for years 1
to 5 respectively. He wants to know his series of deposits value at the end of 5 years with 6%
rate of compound interest.
(21,893)
69
Rule of 69 Dp= .35+
Interest rate
Dp = Doubling Period
I=Interest rate (not in %)
Q.19. If you deposit Rs 500 today at 10% rate of interest, in how many years will
this amount double? (7.25 years)
Q.20.How long will it take to double your money if it grows at 12% annually?(6
years)
Dr. Ankit Jain 21
Present Value
a. Present value of single amount
1 n
PV=FV or FV (PVIFI.n)
(1+I)
Where PV = Present value at beginning of the year
FV = Future value receivable at the end of ‘n’ years
I = Interest rate or discounting factor or cost of capital
n = Duration of the cash flow.
PVIFI.n = Present value interest factor at ‘I’ interest and for
‘n’ years
Dr. Ankit Jain 22
Q.21An investors wants to find the present value of Rs.40000 received
after 3 years. His interest rate is 10%.
(30040)
Q.22 What is the present value of Rs. 2,67,600 which will received
after 5 years at 6% rate of interest?
(1,99,897)
Q.23 Calculate the present value of each of the following cash flows
using a discount rate of 14%
a. Rs 2,000 cash outflow immediately
b. Rs 6,000 cash inflow one year from now
c. Rs.6,000 cash inflow two years from now
d. Rs 7,000 cash inflow four years from now
Dr. Ankit Jain 23
b. Present value of a series of cash flows
1.Present value of uneven cash flows
A
PV=
I
PV= Present value of Perpetuity
A= Constant annual cash inflow
I= Interest rate
Q26 Mr. A an investor expects a perpetual amount of Rs 1000 annually from
his investment. What is his present value of perpetuity if the interest rate is
8%?
(12,500)
I m
ERI= 1+ −1
m
of
• Sinking Fund
• Loan Amortisation
• Equated Monthly Investment
• CAGR
In other words, it’s like a savings account that you deposit money in
regularly and can only be used for a set purpose.
𝐹𝑉𝐴𝑛 𝐼
AP =
1 (1+𝐼)𝑛 −1
AP = Annual Payment
FVAn = Future value after n number of years
I= Interest rate
Or
P
LI=
PVIFAI.n
LI= Loan instalment
P= Loan amount
I = Interest rate
N= Loan repayment period Dr. Ankit Jain 37
Q.30 A company has raised a loan of Rs 50 lakh from an industrial
finance bank at 9% per annum. The amount has to be paid back in 5
equal yearly instalments. Calculate the instalment amount. (12,85,347
or 12,84,879)
P= Loan amount
I= Interest rate per month
n=Loan period in months
• The compound annual growth rate, also called CAGR, is the return on
investment over a period of time. It measures a true return on an
investment by calculating the year over year returns, compounding
them, and considering the investment values.
• In other words, it’s a far more accurate way to measure the overall
return on an investment than using an average returns method.
Q.33 From the following dividend data of a company, calculate compound growth
rate of growth for period (2012-2017).
Year 2012 2013 2014 2015 2016 2017
DPS 21 22 25 26 28 31
(gr=8%)
Dr. Ankit Jain 41
Test Yourself
Q.1 Your mother is planning to retire this year. Her firm has
offered her a lump sum retirement payment of Rs.50,000 or a
Rs.6,000 lifetime ordinary annuity-whichever she chooses.
Your mother is in reasonably good health and expects to live
for at least 15 more years. Which option should she choose,
assuming that an 8 percent annual interest rate is appropriate to
evaluate the annuity?
(69,025)
Dr. Ankit Jain 43
Q.3 If you wish to accumulate Rs.1,40,000 in 13 years, how much must you
deposit today in an account that pays an annual interest rate of 14%?
(25480 or 25491)
Q.4 Calculate the present value of a perpetuity bond that is expected to pay Rs
5000 of interest per year forever if the investor requires an annual return of 8
percent.
(62500)
Q.5 Mr. A are planning ahead for their son's education. He's eight now and will
start college in 10 years. How much will they have to set aside at the end of each
year to have Rs. 65,000 in 10 years if the annual interest rate is 7%?
(4,704.55)
Q.7 You are planning to retire in twenty years. You'll live ten years after
retirement. You want to be able to draw out of your savings at the rate of Rs.
10,000 per year. How much would you have to pay in equal annual deposits
until retirement to meet your objectives? Assume interest remains at 9%.
[1254]
Q.9 If you want a Rs.10,00,000 for retirement in 30 years, how much would
you have to save by the end of each year if you could make 12% per year? How
much would you have to set aside each year if you could put money away
starting now?
(4144)