Time Value of Money

Dr. Akshita Arora

ASM
Learning Objectives
 Concept- Time value of Money
 Discounting and Compounding Techniques
 Annuity Series
 Sinking Fund Deposit
 Loan Amortization Schedule
 Calculation of loan EMI
 Rule of 72
Time Value of Money
 the worth of a unit of money is going to be change in future.
 the value of one rupee today will be decreased in future.
 Techniques of Time Value of Money

 Compounding
Technique- used to find out
the future value of the
present amount.
FV = PV (1 + r)^n

 Discounting Technique-
used to find out the present
value of the future amount.
PV = FV / (1 + r)^n
 Excel commands
Calculator
Purpose Excel Function
Key
Solve for Number of N NPer(rate, pmt, pv, fv, type)
Periods

Solve for periodic I/Yr Rate(nper,pmt,pv,fv,type,guess)

interest rate

Solve for present PV PV(rate,nper,pmt,fv,type)

value
Solve for annuity PMT PMT(rate,nper,pv,fv,type)
payment

Solve for future value FV FV(rate,nper,pmt,pv,type)

Solving for FV

Example 1: Solving for FV

Present Value 100

Years 5

Annual Rate 10%

Future Value : 161.05

Solving for PV

Example 2: Solving for PV

Future Value 100,000

Years 18

Annual Rate 8%

Present Value : 25,024.90

Solving for Nper

Example 3: Solving for Nper

Present Value 1,250

Future Value 2,500

Annual Rate 9%

Number of Periods 8.04

Solving for Rate
Suppose that you are planning to send your daughter to college in 18
years. Furthermore, assume that you have determined that you will
need Rs.100,000 at that time in order to pay for tuition, room and
board, party supplies, etc. If you have Rs.20,000 to invest today, what
compound average annual rate of return do you need to earn in order
to reach your goal?

Example 4: Solving for Rate

Present Value 20,000
Future Value 100,000
Years 18

Annual Rate 9.35%

 Q1

 Suppose you deposit Rs. 1000 annually in a bank for 5 years (at
the end of the year) and your deposits earn a compound
interest rate of 10%. What will be the value of this series of
deposits at the end of 5 years?
 Q2
 A service agency offers following options for 3 years
contract.
i) Pay Rs. 2500/- now and no more payment during next 3
years.
ii) Pay Rs.900/- each at the end of 1st year, 2nd year and 3rd
year.
Suggest a client having rate of interest of 10% p.a.
 Q3
 Suppose you have decided to deposit Rs. 30,000 per
year in your Public Provident Fund Account for 30
years. What will be the accumulated amount in your
PPF A/c at the end of 30 years if the interest rate is
8%?
 Q4
 You want to buy a house after 5 years when it is
expected to cost Rs. 2 million. How much should
you save annually if your savings earn a
compound return of 12 % ?
Solution:
Annual savings should be-
 Q5
 Futura Limited has an obligation to redeem Rs. 500 million
bonds 6 years hence. How much should the company deposit
annually in a sinking fund account wherein it earns 14%
interest, to cumulate Rs. 500 million in 6 years time?

 The annual sinking fund deposit should be -

 Q6
 Suppose a firm borrows Rs.10,00,000 at an interest rate of
15% and the loan is to be repaid in 5 equal installments
payable at the end of each of the next 5 years. Prepare loan
amortization schedule.
 Q7
To calculate EMI on your loan
 Ranbir Singh, 30, a New Delhi-based store manager, bought a
car in 2019 worth Rs 5.95 lakh. He made a down payment of
Rs 1.5 lakh and took an auto loan for the rest of the amount
at 12% interest per annum for four years. At present, he is
paying an EMI of Rs 15,000 per month. However, he has no
way of knowing if the amount is correct or not.
You being the student of Corporate Finance and an
expert in Time Value of money are advised to help Ranbir.
Rule of 72
 A simple way to determine how long an investment will take
to double, given a fixed annual rate of interest.
 By dividing 72 by the annual rate of return, investors
obtain a rough estimate of how many years it will take for the
initial investment to duplicate itself.
 It states that $1 invested at an annual fixed interest rate of
10% would take 7.2 years ((72/10) = 7.2) to grow to $2.
 https://www.youtube.com/watch?v=12FsjiVzTMA
What is the Rule of 72 Used For?
 Investors often use this calculation when evaluating the
difference between similar investments.
 They want to see their investments grow, so they can take the
proceeds to invest in more opportunities in the future.