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    Time Value

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    Avnit kumar
    The document discusses time value of money concepts like compounding, discounting, future value and present value. It provides examples of calculating future and present values of lumpsums and annuities using formulas. Interest rates, number of periods and payment amounts are used to determine future and present values in different scenarios like savings goals, investments and prizes. The rule of 72 is also introduced to calculate doubling period from an interest rate.

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    Time Value

    Uploaded by

    Avnit kumar
    49 views18 pages
    The document discusses time value of money concepts like compounding, discounting, future value and present value. It provides examples of calculating future and present values of lumpsums and annuities using formulas. Interest rates, number of periods and payment amounts are used to determine future and present values in different scenarios like savings goals, investments and prizes. The rule of 72 is also introduced to calculate doubling period from an interest rate.

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    The document discusses time value of money concepts like compounding, discounting, future value and present value. It provides examples of calculating future and present values of lumpsums and annuities using formulas. Interest rates, number of periods and payment amounts are used to determine future and present values in different scenarios like savings goals, investments and prizes. The rule of 72 is also introduced to calculate doubling period from an interest rate.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    49 views18 pages

    Time Value

    Uploaded by

    Avnit kumar
    The document discusses time value of money concepts like compounding, discounting, future value and present value. It provides examples of calculating future and present values of lumpsums and annuities using formulas. Interest rates, number of periods and payment amounts are used to determine future and present values in different scenarios like savings goals, investments and prizes. The rule of 72 is also introduced to calculate doubling period from an interest rate.

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    © All Rights Reserved
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    of 18

    Time value of Money

    Compounding: The process of calculating future


    value of cash flows:
    Single Amount
    Annuity

    Discounting: The process of calculating present value


    of cash flows
    Single Amount
    Annuity
    FV of a Lumpsum

    FV=PV(1+r)^n
    Future Value of a lump sum
    Find the future value of Rs 1,000 placed in a fixed
    deposit account at 10% interest for 3 years.

    Ans:1331
    =1000*1.331
    Future value of an annuity: payments made
    at EOY
    Find the future value of a deposit of Rs 1,000 pa for 3
    years at 10% pa. Assume that the deposit is made at
    the end of each year

    3310
    1000+1100+1210
    3.310*1000
    Find the future value of a deposit of Rs 5,000 for 8
    years at 6% pa.
    Find the value if the deposit is made for 12 years

    7969.24 (1.594*5,000)
    10060 (2.012*5,000)
    Find the future value of a deposit of Rs 5,000 per
    annum for 8 years at 6% pa.
    Find the value if the deposit is made for 12 years

    Assume deposits at the end of each year.

    9.897*5000= 49,485
    16.87*5000= 84,350
    You plan to go abroad for higher studies after
    working for the next five years and understand that
    an amount of Rs.2,000,000 will be needed for this
    purpose at that
    time. You have decided to accumulate this amount by
    investing a fixed amount at the end of each year in a
    safe scheme offering a rate of interest at 10 percent.
    What amount should you invest every year to achieve
    the target amount?

    FV at 10% for 5 years =6.105


    =2,000,000/6.105= Rs. 327,600
    How much should Vijay save each year, if he wishes
    to purchase a flat expected to cost Rs.80 lacs after 8
    years, if the investment option available to him offers
    a rate
    of interest at 9 percent? Assume that the investment
    is to be made in equal amounts at the end of each
    year.

    FVIFA (9 %, 8 years)=11.028
    80,00,000 / 11.028 = Rs. 7,25,426
    A finance company advertises that it will pay a lump
    sum of Rs.100,000 at the end of 5 years to investors
    who deposit annually Rs.12,000. What interest rate is
    implicit in this offer?

    100,000 / 12,000 = 8.333


    FVIFA (24%, 5 years) = 8.048
    FVIFA (28%, 5 years) = 8.700

    Using linear interpolation in the interval,


    24%+((8.333– 8.048)/(8.700 – 8.048))*4%=25.75%
    You can save Rs.5,000 a year for 3 years, and Rs.7,000
    a year for 7 years thereafter. What will these savings
    cumulate to at the end of 10 years, if the rate of
    interest is 8 percent?

    FV factor 10 years =14.487


    FV factor 7 years =8.923

    14.487*5000+8.923*2000 =90,281
    A leading bank has chosen you as the winner of its
    quiz competition and asked you to choose from one
    of the following alternatives for the prize: (a) Rs.
    60,000 in cash immediately or (b) an annual payment
    of Rs. 10,000 for the next 10 years. If the interest rate
    you can look forward to for a safe investment is 9
    percent, which option would you choose?

    =2.367*60000 =1,42,020

    15.192*10000 =1,51,920
    Doubling Period
    Rule of 72

    72/interest rate = doubling period


    In how many years will an amount double if the
    interest rate is 6% pa?

    72/6=12

    If an amount doubles in 9 years,what is the interest


    rate pa?
    72/9 =8%
    If you deposit Rs.5,000 today at 12 percent rate of
    interest in how many years (roughly) will this amount
    grow to Rs.1,60,000 ? Work this problem using the
    rule of 72–do not use tables.

    72/12=6
    =160000/5000=32=2^5
    6*5=30 years
    Present Value of Money
    An amount of money received today is worth more
    than the same amount of money received in future
    PV of a lumpsum
    What is the present value of Rs 10,000 receivable at
    the end of 8 years if the discount rate is 10%?
    8%?

    10000*.466=4660
    10000*.540=5400
    PV of an annuity
    What is the PV of a 5 year annuity of Rs 10,000 at 10%?
    What is the PV of an 8 year annuity of Rs 10,000 at 10%?

    =.909+.826+.751+.683+.621=3.79
    =.909+.826+.751+.683+.621+.564+.513+.466=5.33

    3.79*10,000=37,900
    5.33*10000=53,300

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