TIME VALUE OF MONEY

Present Value & Future value

P.V. = Amount Inflows P.V. Factor = P.V. Factor

1 ( 1+ Interest rate ) n

n = Number of Years
Future Value = Amount of Inflows

Problem Example
Q. A company has invested Rs1,00,000/- through a bank in the year 2011 and the made a contract to provide an interest of 10% compounded annually to the company. With the same condition the bank providedRs50,000/-, Rs40,000/-, Rs30,000/- and Rs20,000/- in the 1st, 2nd , 3rd and 4th year respectively to the company as their returns condition. Find the net rate of interest return to the company and say whether this project should be accepted by the company or not.

Solution..
Year 2011 2012 2013 2014 Money Inflows Rs50,000/Rs40,000/Rs30,000/Rs20,000/P.V. Factor=1/(1+r) n 1/(1+0.10) 1 = 0.909 2 1/(1+0.10) = 0.826 1/(1+0.10) 3 = 0.751 1/(1+0.10) 4 = 0.683 P.V. 50,000(0.909)=45,450 40,000(0.826)=33,040 30,000(0.751)=22,530 20,000(0.683)=13,660 Rs1,14,680/Net Present Value = P.V. of Inflows P.V. of Outflows = (Rs1,14,680/-) - (Rs1,00,000/-) = Rs14,680/ As the net present value is positive the project is profitable and should be accepted by the company. Net rate of interest= N.P.V. / P.V. of Outflows (14,680/ 1,00,000) 100 = 14.68%

Working Utilities of the Concept N.P.V

Net Rate of Interest

Profitability Index
(1, greater than 1 and less than 1)

PRESENT

FUTURE

Thank You