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 The time value of money (TVM) is the idea that money
available at the present time is worth more than the
same amount in the future due to its potential earning
capacity. This core principle of finance holds that,
provided money can earn interest, any amount of money
is worth more the sooner it is received.
 Time Value of Money (TVM) is an important concept in
financial management. It can be used to compare
investment alternatives and to solve problems
involving loans, leases, savings.

 There are certain reason which determine that moneyhas
time value following are the reason;
1. Risk andUncertainty –Asweknowfuture is never certain andwe
can’
t determines the risk involved infuture because outflow of cashis in
ourhandas paymentwhereas there is no certaintyforfuture cash
inflows.
2. Inflation - In aninflationary economy, the moneyreceived today, has
morepurchasing powerthan the moneyto be received in future. In
other words, arupee today represents a greater real purchasing power
than arupee in future
Reasons for Time Value of Money

 Consumption - Individuals generally prefer current
consumption to future consumption.
 Investment opportunities - An investor can profitably
use the received money today to get higher return
tomorrow or after a certain period of time.
 e.g.- if an individual is given an alternative either to
receive Rs.10,000 now or after one year, he will prefer
Rs.10,000 now. This is because, today, he may be in a
position to purchase more goods with this money than
what he is going to get for the same amount after one
year.

Future Value and Compounding
 Future value refers to the amount of money an investment will grow to over some
length of time at some given interest rate
 To determine the future value of a single cash flows, we need:
 present value of the cash flow (PV)
 interest rate (r), and
 time period (n)
 FVn = PV0 × (1 + r)n
 Future Value Interest Factor at ‘r’ rate of interest for ‘n’ time
periods
 Examples on computation of future value of a single cash flow

Jacob is considering investing Rs. 15,000 in bonds at a
rate of interest of 16% for 7 years. How much he would
get after 7 years.
F= 15,000(1.16)7
= 15,000 x CVF (2.826)
= 42,390

If you deposit Rs. 55,650 in a bank, which was paying a
15% rate of interest on a 10 year time deposit, how much
would the deposit grow at the end of 10 years?
FV= 55,650 x (CVF10,.12)

Multiperiod Compounding
General Formula:
FVn = PV0(1 + [r/m])mn
n: Number of Years
m: Compounding Periods per Year
r: Annual Interest Rate
FVn,m: FV at the end of Year n
PV0: PV of the Cash Flow today

 Jacob is considering investing Rs. 15,000 in
bonds at a rate of interest of 16% for 7 years.
How much he would get after 7 years, when
interest is compounded semi-annually.
 From Table, we find that CVF at 8% interest
factor for 14 periods is 2.937. thus compound
value of 15,000 is
 =15,000 X 2.937
 =44,055

 Would the compound value of Jacob’s
investment of Rs 15,000 will be different if
interest compound quarterly?
 =15,000(1.04)28
 =15,000X 2.999= 44,995

Compound Value of an Annuity
 An annuity is a fixed payment or receipt of
each period for a specified number of periods.
 Fn= A 11
 A person deposits Rs. 10,000 at the end of
each year for 5 years at 12% of interest. How
much would the annuity accumulate.
 F= 10,000(CVAF,12%5)
 =10,000 x6.353= 63,530
1+in N-1
n

 Suppose a firm deposits 5,000 Rs. At the end
of each year for four years @ 6% rate of
interest. How much this annuity would
accumulate at the end of four years?
 =5,000*4.376=21,873

Present Value and Discounting
 The current value of future cash flows discounted at the
appropriate discount rate over some length of time period
 Discounting is the process of translating a future value or a set of
future cash flows into a present value.
 To compute present value of a single cash flow, we need:
 Future value of the cash flow (FV)
 Interest rate (r) and
 Time Period (n)

PV0 = FVn / (1 + r)n
 PVIF (r,n)
 Examples

 What would be the value of 50,000 Rs.
Received after 20 years @ 9% rate of interest.
 The present value factor is 0.178

 Suppose Mr. Ram pays 10,000 at the end of
each year for 5 years into a PPF. The interest
rate being 12%. What is the present values of
the series of 10,000 each paid for 5 years?
 =10,000 x 3.605
 =36050

 Mr Shyam is considering paying 5,000 half
yearly into his PPF for 10 years. Suppose the
interest rate is 12% p.a. How much is the
present value of his payment?
 P= 5,000 x PVAF 6%, 20= 5,000 x 11.470
 =57,350

 A company has issued debentures of Rs. 50
lakh to be repaid after 7 years. How much
should the company invest in a sinking fund
earning 12% in order to be able to pay
debentures?

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A presentation on the concepts of time_value_of_money.pptx

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A presentation on the concepts of time_value_of_money.pptx