Time Value of Money

Time Value of Money

A Rupee Today is Worth More than a Rupee Expected in Future A Bird in Hand is Better than Two Birds in a Bush We Prefer Money at Present than the Same Amount in Future:
A Rupee Invested, would Earn Interest; would be more than one Rupee in Future One who foregoes Consumption at Present, must be compensated for Forbearance & Risk

Time Value of Money

Time is important in Time Value Analysis Time Line:
*--------*--------*---------*---------*---0 1yr. 2yr. 3 yr. 4yr. 5yr. Rs. 100 today at time 0 becomes at, yr 1 end => 100 + 10% (100) = 110; or 100 *(1 + .10) yr.2 end => 110 + 10% (110) = 121; or 110* (1+.10) yr 3 end => 121 + 10% (121) = 133.1; or 121 * (1+ .10)

Time Value of Money

Compounding- Process of Going from Todays value (PV) to Future Value (FV)

Discounting Process of looking from

Future Value (FV) to Present Value (PV) Discounting is reciprocal of Compounding

Time Value of Money

Time Value Concept under Four heads: a). Future Value of Single Payment at Present b). Future Value of stream of payments in various Years c). Present Value of a Payment in Future d). Present Value of Stream of Payments in Future

Time Value of Money: Future Value of a Single Payment at Present

Deposit of Rs 100 in saving a/c @ 10% = 100 + (1 + .10) = 110 at end of 1st yr; 100 + (1 + .10) = 121 at end of 2nd yr FV = PV (1+ r) , where, r = rate of interest n = number of years

Rs 2000 invested in bond @ 8% = Rs. 4,318 at 10 yr end, 2000 (1+ .08) = 2000 2.159 = 4,318 Use Table Future Value of Single Payment to ascertain discount factor

Time Value of Money: Future Value of Annuity Payments in various Yrs.

Annuity is a series of payments made at fixed

intervals for a specified number of Periods Rs.100 deposited at the end of every year @ 5%= 100 + 100 (1 +.05) + 100 (1 + .05) + = 100 + 105 + 110.25 = 315.25

Time Value of Money: Future Value of Annuity Payments in various Yrs.

A = P + P(1+r)+ P (1+r) +----+P(1+r)n-1 100 deposited 3rd yr end = Rs 100 100 deposited 2nd yr end = 105 100 deposited 1st yr end = 110.25 315.25

Time Value of Money: Future Value of Annuity Payments in various Yrs.

Annuity: is a series of payments made at

fixed intervals for a specified number of Periods Ordinary annuity or Deferred Annuity:
Annuity payment at the end of each period

Annuity Due Annuity payment at the Beginning of each Period We assume Ordinary Annuity

Time Value of Money:

Present Value of a Payment in Future

Suresh expects to receive Rs 100 on the expiry of ten years

What is its value at present when interest rate = 5% = Ra. 100 * .614= Rs. 61.40

Rohan expects to receive Rs. 10,000 thiry years from nor, r= 8%

= Rs. 10,000 * .099 = 990

Time Value of Money:

Present Value of a Payment in Future

pays 5 % interest = how much to deposit today to have Rs 100 ten yrs from now? /1.629 = 61.39 100

A bill for Rs 100 is due ten yr from now; bank

PV of Rs 10,000 to be received thirty yrs from now , discounted at 8% ?

FV = 1/ (1 + r) n P; value of 1/ (1 + r) n from
Table PV of single payment
10,000 * 0.099 = 990

Time Value of Money:

Present Value of Stream of Payments in Future

You expect to receive Rs. 100 at the end of each year for next ten years
Rate of discount being 10% = 100 * 6.145 = 614.5

Required to pay Rs. 100 every year for two years, interest rate = 5%; how much to save today for the purpose = Rs. 100 * 1.859 = Rs. 185.90

Time Value of Money:

Present Value of Stream of Payments in Future

PV of Rs. 100 received at end of each year for next ten years, discounted at 10%? Saving interest rate 5%; how much to deposit today in order to have 100 two yrs from today? V = 100/(1+ .05) + 100 /(1+.05) =95.20 + 90.70 = 185.90 V = P/(1 +r) + P/(1+r) +----- P/(1+r)n 6,14.5; 185.90

Time Value of Money:

Present Value of Stream of Payments in Future

You deposit Rs. 1,00,000 in a bank @
10%; how much can be withdrawn annually for:

Three years, or
Ten years, or

Twenty years

Time Value of Money:

Present Value of Stream of Payments in Future You deposit Rs. 1,00,000 in a bank @ 10%; how much can be withdrawn annually for:

Five years, or = PV=(Rs.100,000) * (1

/1.1)5 = 1,00,000/3.791 = 26,378 Ten years, or 1,00,000/ 6.125 = 16,273 Twenty years, 1,00,000/ 8.145 = 11,745

Time Value of Money:

Present Value of Stream of Payments in Future

Capital Recovery Factor:

Rs. 1,00,000 deposited in a bank earns 10%; how much can be withdrawn annually:
a) for five yrs. 100000/3.791 26,378

b) for 10 yrs, 100,000/6.145 16,273

c) for 20 yrs 1,00,000/8.514 11,745

Time Value of Money Ascertain Interest Rate

Deposit lump sum Rs. 20,000 initially,
bank promises to pay annually a) Rs. 2,000 for 20 Yrs.; b)Rs,3,000 for 8 yrs Ascertain interest rate? a) 6-7 % b) 4-5%

Time Value of Money

Rule 72 & Rule 69 To ascertain years in which amount gets double at a certain rate of interest?= 72/ r Doubling Period = 72/ rate of interest For example: 8% amount gets double=9 yrs Rule 69 0.35 +69/interest rate 0.35 + 69/10 = 7.25 yrs

Time Value of Money

Short- Period Compounding: Compounding be done half-yrly; or quarterly ( twice, four times a year) interest rate gets half & years

are doubled
For Example: 10,000 deposited 10% sixmonthly compounding=Fv = PV (1+ r) nFV F = P (1 + r/2) n2

Time Value of Money

Effective & Nominal Rate Nominal Rate or Quoted Rate or Contracted Rate or Stated Rate => Compounding annually Effective Rate or Equivalent Annual Rate (EAR) EAR = (1+ r/2) 1.0 (1+.10/2) = (1 + 0.10/2)n =1.0

Future Value of an Investment

Rs 100 deposited in bank @ 5% after one yr.= Rs 100 deposited in bank @ 5% after two yr.= Rs 100 deposited in bank @ 5% after five yr.= Rs 100 deposited in bank @ 5% after ten yr.= Rs 100 deposited in bank @ 5% after twenty yr.=

Rs. 2,000 invested in share grows @ 8% compound at end ten yrs. =

Future Value of Stream of Investment

Rs 100 in bank @ 5% after one yr.= Rs 100 deposited in bank every yr. @ 5% after two yr.= Rs 100 deposited in bank every yr. @ 5% after five yr.= Rs 100 deposited in bank every yr. @ 5% after ten yr.= Rs 100 deposited in bank every yr. @ 5% after twenty yr.=

Rs. 2,000 invested in share every yr. grows @ 8% compound at end ten yrs. =

Present value of an Future Receipt

You expect to Receive Rs.100 one yr. from now,

its present value @ 5% ? =

You expect to Receive Rs.100 at the end of second yr. from now, its present value @ 5% ? =

With 5 % investment opportunity, how much

amount today will become Rs.100 two yrs from now? =

How much will you need to invest today at 4% in

order to have Rs. 1000 five yrs. from now? = A promise to pay Rs. 10,000 fifteen years from

today is worth Rs.. today with 5% return

Present value of Future Receipts

What is the present value of inflows of Rs.100 for one yr@ 10 % deposit rate?== What is the present value of inflows of Rs.100 every yr, for two yr @ 10 % deposit rate?== What is the present value of inflows of Rs.100 every year for five yr @ 10 % deposit rate?== What is the present value of inflows of Rs.100 every year for twenty yrs @ 10 % deposit rate?==