Professional Documents
Culture Documents
Saranga Gunasekara
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Look ahead
Definition:
time value of money is the premise that an
investor prefers to receive a payment of a
fixed amount of money today, rather than an
equal amount in the future, all else being
equal.
Source: http://en.wikipedia.org/wiki/Time_value_of_money
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Time Value of Money
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Importance of Time Factor
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Calculations based on the time value
of money
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Notations
‘r’
is the rate at which the amount will be
compounded each period
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Formulas
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Formulas
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Time value of money
Consider 2 situations
– Option A: You receive Rs. 10,000 today.
– Option B: You receive Rs. 10,000 in 3 years time
– Assume no inflation
– Assume interest rate 10% (Compound Interest)
– Assume no change in any other financial
situation
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Future Value Calculation
Consider Option A
Let’s calculate the future value of Rs. 10,000
received at the present time.
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Future Value Calculation
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Present Value Calculation
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Time Value of Money
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Time Value Calculations using Tables
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Benefits of the knowledge of the time
value of money
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Useful References
http://en.wikipedia.org/wiki/Time_value_of_money
http://www.investopedia.com/
http://www.studyfinance.com/
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Thank you
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