# Financial Management Lecture 4 Date: 20/03/13 Time Value of Money Time value of money is the value of an amount of money in the

present or at any time in the future. There are two types of time value of money - present value and future value. Present Value Present value is the value of an amount that will be received in the future. For example, suppose you will receive \$1000 after 1 year. What is the present value of this money? Future Value Future value is the value of a present amount in the future. For example, suppose if you deposit \$1000 in a bank account which pays 12% interest, what is the future value of this amount? Opportunity Cost For example, you will receive \$1 now and \$1 tomorrow. Value of \$1 today is greater than value of \$1 tomorrow - this is because of opportunity cost. Opportunity cost of receiving the \$1 in the future is the interest that you could have earned if you received \$1 sooner. Calculating Future Value of Money Future value of single amount:

Examples: If you deposit \$100 in an account earning 10% interest, a) How much would you have in the account after 1 year?

= \$110 b) How much would you have in the account after 5 years? =\$161 c) What would the future value of this amount be if the interest rate is compounded quarterly? m period per year N= 4 periods per year

5 d) What would the future value of this amount be if the interest rate is compounded daily? After 5 years. =\$164.287.034. =\$164.4 After 5 years.93 Calculating Present Value of Money Example: If you will receive \$1000 after 1 year from now.000 with 6% interest compounded continuously after 100 years? =\$4.After 1 year. =\$110. =\$164.87 What is the future value of \$10. what is the present value of this amount if the opportunity cost is 6%? =\$943.39 .86 e) What would the future value of this amount be if the interest rate is compounded continuously? After 5 years.

2% interest compounded monthly. You have decided to buy a new car which will cost \$170.14% 2.1914 Rate of return= 0. what is the annual rate of return? r= 0.000 in your bank account.1914x100=19.4 .000. If you sold a land for \$12. How long will it take to have enough money to buy the car? n=23.000 that you have bought 5 years ago for \$5000. You have \$40. The bank pays 6.Examples 1.

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