FINANCIAL MANAGEMENT

ASSIGN. NO:-1

TOPIC: - TIME VALU OF MONEY

INTRODUCTION:-

Definition of Time value of money

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.

What is compound interest?

 When interest is paid on not only the principal amount invested, but also
on any previous interest earned, this is called compound interest.

Formula of calculating time value of money

 Future value of a cash flow stream:

FV = S [CFt * (1+r)n-t]
t=0

 Present value of an annuity:

PVA = PMT * {[1-(1+r)-t]/r}

 Future value of an annuity:

FVAt = PMT * {[(1+r)t –1]/r}

What is present value of money?
The current worth of a future sum of money or stream of cash flows given a
specified rate of return. Future cash flows are discounted at the discount rate,
and the higher the discount rate, the lower the present value of the future cash
flows. Determining the appropriate discount rate is the key to properly valuing
future cash flows, whether they be earnings or obligations.

What is future value of money?

The value of an asset or cash at a specified date in the future that is
equivalent in value to a specified sum today. There are two ways to calculate FV:

1) For an asset with simple annual interest: = Original Investment x (1+ (interest
rate*number of years))

2) For an asset with interest compounded annually: = Original Investment x

((1+interest rate) ^number of years)

What is present value of annuity?

The current value of a set of cash flows in the future, given a specified rate
of return or discount rate. The future cash flows of the annuity are discounted at
the discount rate, and the higher the discount rate, the lower the present value of
the annuity.

C = Cash flow per period

i = Interest rate
n = Number of payments
this calculates the present value of an ordinary annuity. To calculate the present
value of an annuity due, multiply the result by (1+i). (The payments start at time
zero instead of one period into the future.)

Solution:-
1st problem solution

(A) At 11%

Capital Amount = 2, 75,000

Monthly compounded int. Rate =

[1+i/12]12 -1

11.57%

EMI =A x r [(1+r)n /(1+r)n-1 ] x 1/12

A = Loan amount

I =Int. Rate

n = year

=3287.81

Here condition is given that you have to pay a Rs.250 appraisal fee and 3 points at
the time of the refinancing (1 point equals 1% of the amount borrowed).

So just have to add 275000+250(appraisal fee)

So new installment will be 3290.80 Rs.

Problem NO 2

Price of the house =56500

12% is already is paid. =
56500*0.12= 6780

56500-6780=49720

PVA= A[1/i-(1/((1+i)^n)i)
i=12% per annum
so 12/12=1 % per month
in terms of month
n=30 years 30*12=360months
49720=A[1/0.01-(1/((1+0.01)^360)*0.01)
511.52 Rs per month
if the loan is repaid in 15 years
then using the same formula mentioned
above
we get 596.72 Rs per month
extra amount to be paid is 596.72-511.52= 85.2Rs extra per month

3rd problem solution

63000 are lying in the account for 24years, so it has to be

compounded.
A= 63000(1+0.08)^24=399494
Rs

The stocks gives a return of 2% hence it has to be compounded for 24

years
B=24500(1+0.02)^24=39406.7
1 RS

Annuity paid per month is 7000.Rs for 10

years
hence future value is found out
FV= A[((1+i)^n-1)/i]
7000(14.486)
101402

this has to be compounded for rest of the 14 years

297817.674
Total amount
=297817.674+101402
C=399219.67

Further 19000 is paid as annuity every year

19000*2.937
56487

A+B+C+D
894607.38

4th problem solution

60 installments on monthly basis will be equal to a period of 5

years.
After 16 months, =16*5/60
1.333333333 years
15000 = A
X PVFA
At interest rate=10%
15000 = A X 3.791
A 3956.739647

Equal monthly payment =3956.74/12

329.7283039
amount paid after 16 months =329.7*16
5275.652862

amount recovery after 16 =(329.7*60)-

months 5276
14508.04537

5th problem solution

future value=16000 X CVF

at interest rate=7% and
time=19 years
Fv =16000*3.617

Rs 57872

6th problem solution

Present value=18000 X PVF

at interest rate=2% time=5yrs
PV =18000*0.906

Rs 16308
Therefore, here we conclude that the investment made
is amounting to Rs 16308 with interest of 2% per annum,
We will receive the amount of Rs 18000 after five years.

Problem No 7

We are invest 11000 today

We are select different way investment interest receive monthly
compound.
N= 1 year ( 12 months) PV= 11000
APV =? int. = 16% p.a
direct 1 year interest
Interest = 16/12(months) find
= 1.333 i=16%
n n
FV = PV(1+i) FV = PV(1+i)
= 11000 (1+.01333)12 = 11000(1.16)1
= 11000*1.17222 = 11660
=
=12894.46 11660
In that way we are find compound interest trough 12894.46 and directly P.A
interest find 11660

Problem No 8

We will have return amount 56000 after 8

years
If we are deposit Rs 1000 saving account
now
FV = 56000 PV = 1000
N=8 I =?
PV (1+i)n = FV
1000 (1+i)8 = 56000
1000 +1000 i8 = 56000
1000 i8 = 55000
I8 = 55000/100
I8 = 55
I= 8√55

Problem No 9
We are investment amount
18000
We will getting 57000
FV = 57000 PV = 18000
N=? i=16%
Log57 =nlog1.16 + log18
1.755=0.06n+1.255
0.5 = .06n
N= 8.33

problem No 10
since the principal values on both sides
P(1+r/100)^n
(1+0.09)^6=(1+r)^3
1.67=(1+r)^3
r=0.18
The rate of interest that bank B should will be 18%.
ANALYSIS:-
In the first problem the new installment will be 3290.80rs. which is more
than previous payment. Because according to time value of money due to inflation
rate the value of money goes down and the price of the commodity will increase

In the second problem Mr. Ramesh and laxmi wants to repay the loan
within 15 years instead of 30 years. Therefore they have to pay 85.2 rs. Extra per
month. So in 15 years they have to pay almost 15,000 rs. More but according to
time value of money concept the value of money will decrease in future so that they
can easily recover their money in next 15 years.

In the third problem after 24 years the amount of saving will become 3,
99,994 rs. And stock investment amount will become 39,406.71rs. After calculating
the compound interest the total amount will become 8, 94,076.38rs.

In the fourth problem, after 16 month I will pay 14,506rs. The price of the
car is 15,000 but the bank also required the 10% interest so after 16 month i will
own 95%

In the fifth case birjesh will get 57872rs. After 19 years

In the sixth case to have 18000rs. In five year with the compound interest
rate of 2% he should deposits 16308rs. In the bank

In the seventh case total amount will be 11660rs.

In eight case to earn 56,000rs. In 8 year by depositing 1000rs. I should at

least get 6.48% interest

In the ninth case to earn 57,000rs. By depositing 18,000rs. With interest

rate of 16% compound interest it will require 8.33 years.

In the tenth case the compound quartly interest of the bank B will be 18%