1.

What is financial management

2. Which is the primary goal of financial management?
3. Objectives of financial management
4. Importance of financial management
5. Top 10 Functions of financial management
6. What is time value of money
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.

7. When time value concept is used

The time value concept is used

1. To compare the investment alternatives to judge the feasibility of proposals.

2. In choosing the best investment proposals to accept or to reject the proposal for
investment.

3. In determining the interest rates, thereby solving the problems involving loans,
mortgages, leases, savings and annuities.

4. To find the feasible time period to get back the original investment or to earn the
expected rate of return.

5. Helps in wage and price fixation.

8. What are the techniques Used to Understand the Concept of Time Value of Money
Basically two techniques are used to find the time value of money.
They are:
1. Compounding Technique or Future Value Technique
2. Discounting Technique or Present Value technique
3. Annual Equivalent method (Discounting Technique or Present Value technique)
4. Uneven cash flows Present value tecnique

9. What is compound value concept

 The compound value concept is used to find out the Future Value (FV) of present
money. A Future Value means that a given quantity of money today is worth more than what
will be received at some point of time in future.

The compounding technique to find out the FV to present money can be explained
with reference to:
i) The FV of a single present cash flow,
ii) The FV of a series of equal cash flows and
iii) The FV of multiple flows.
i) FV of a Single Present Cash Flow: The future value of a single cash flow is defined in
term of equation as follows:

Mr. A makes a deposit of Rs. 10,000 in a bank which pays 10% interest compounded
annually for 5 years. You are required to find out the amount to be received by him after
5 years.
Solution:

ii) Future Value of Series of Equal Cash Flows or Annuity of Cash Flows:
cash flows of the same amount every year for a number of years consecutively, instead of
a single cash flow.
For example, a deposit of Rs. 1,000 each year is to be made at the end of each of
the next 3 years from today.
This may be referred to as an annuity of deposit of Rs. 1,000 for 3 years. An
annuity is thus, a finite series of equal cash flows made at regular intervals.
In general terms, the future value of an annuity is given as:
 Illustration:
Mr. A is required to pay five equal annual payments of Rs. 10,000 each in his deposit
account that pays 10% interest per year. Find out the future value of annuity at the end of
four years.
Solution:

iii) Future Value of Multiple Flows:

Illustration:
Suppose the investment is Rs. 1,000 now (beginning of year 1), Rs.2,000 at the beginning
of year 2 and Rs.3,000 at the beginning of year 3, how much will these flows accumulate
at the end of year 3 at a rate of interest of 12 percent per annum?
Solution:
To determine the accumulated sum at the end of year, add the future compounded
values of Rs. 1,000, Rs.2, 000 and Rs.3, 000 respectively:

10.What is Present Value Concept

Present Value Concept:
Present value concept is the reverse of compounding technique and is known as the
discounting technique.
Finding out present value of future money Present value concept or
discounting technique
The present value is calculated by discounting technique by applying the
following equation:
The discounting technique to find out the PV can be explained in terms of:
i) Present Value of a Future Sum:
The present value of a future sum will be worth less than the future sum because one
forgoes the opportunity to invest and thus forgoes the opportunity to earn interest
during that period. In order to find out the PV of future money, this opportunity cost
of the money is to be deducted from the future money.
The present value of a single cash flow can be computed with the help of
following formula:

Illustration:
Find out the present value of Rs.3, 000 received after 10 years hence, if the
discount rate is 10%.
Solution:

Illustration:
Mr. A makes a deposit of Rs. 5000 in a bank which pays 10% interest compounded
annually. You are required to find out the amount to be received after 5 years.
Solution:

ii) PV of a Series of Equal Future Cash Flows or Annuity:

A decision taken today may result in a series of future cash flows of the same amount
over a period of number of years.
For example, a service agency offers the following options for a 3-year contract:
a) Pay only Rs.2, 500 now and no more payment during next 3 years, or
 b) Pay Rs.900 each at the end of first year, second year and third year from now. A
client having a rate of interest at 10% p.a. can choose an option on the basis of the
present values of both options as follows:
Option I:
The payment of Rs.2, 500 now is already in terms of the present value and therefore
does not require any adjustment.
Option II:
The customer has to pay an annuity of Rs.900 for 3 years.

In order to find out the PV of a series of payments, the PVs of different amounts
accruing at different times are to be calculated and then added. For the above
example, the total PV is Rs.2, 238. In this case, the client should select option B, as
he is paying a lower amount of Rs.2, 238 in real terms as against Rs.2, 500 payable in
option A.

The present value of an annuity may be expressed as follows:

Illustration:
Find out the present value of a 5 years annuity of Rs.50, 000 discounted at 8%.
Solution:

11.Expain How to find Present Value of Series of Equal Cash Flows (Annuity)
 The formula for calculating the present value of a single future cash flow may be
extended to compute present value of series of equal cash flow as given below:

Example:
An LED TV can be purchased by paying Rs.50,000 now or Rs.20,000 each at the end of first,
second and third year respectively. To pay cash now, the buyer would have to withdraw the
money from an investment, earning interest at 10% p.a. compounded annually. Which option is
better and by how much, in present value terms?
Solution:
Let paying Rs.50,000 now be Option I and payment in three equal installments of
Rs.20,000 each be Option II, the present value of cash outflows of Option II is
computed as:
12.How to find Present Value of a Series of Unequal Cash Flows:
The formula for calculating the present value of a single future cash flow may be
extended to compute present value of series of unequal cash flows as given below:

Example:
Ms. Ameeta shall receive Rs.30,000, Rs.20,000, Rs.12,000 and Rs.6,000 at the end of first,
second, third and fourth year from an investment proposal. Calculate the present value of her
future cash flows from this proposal, given that the rate of interest is 12% p.a.
Solution:
 Implication:
If Ms. Ameeta lends Rs.55,086 @ 12%p.a, the borrower may settle the loan by
paying Rs.30,000, Rs.20,000, Rs.12,000 and Rs.6,000 at the end of first, second, third
and fourth year.

13. What is Perpetuity and illustrate how to calculate with examplw

It refers to a stream of equal cash flows that occur and last forever. This implies that the
annuity that occurs for an infinite period of time turns it to perpetuity. Although it may seem
a bit illogical, yet an infinite series of cash flows have a finite present value.
Examples of Perpetuity:
(i) Local governments set aside funds so that certain cultural activities are carried on a
regular basis.
(ii) A fund is set-up to provide scholarship to meritorious needy students on a regular basis.
(iii) A charity club sets up a fund to provide a flow of regular payments forever to needy
children.
The present value of perpetuity is computed as:

Example:
A philanthropist wishes to institute a scholarship of Rs.25,000 p.a., payable to a meritorious
student in an educational institution. How this amount should he invest @ 8% p.a. so that the
required amount of scholarship becomes available as yield of investment in perpetuity.