TIME VALUE OF MONEY EXPLAINED

TIME VALUE OF MONEY
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 Introduction of Time Value Money
Financial managers and investors are always confronted with opportunities to earn positive
rates of returns on their funds, whether through investment in attractive projects or in interest-
bearing securities or deposits. Therefore, the timing of cash outflows has important economic
consequences which financial manager explicitly recognize as the time value of money. Time
value is based on the belief that money today is worth more than an amount that will be
received at some future data.
 Time Value of Money:
When we talk about the time value of money, we recognize that people prefer to receive a
given amount of money now rather than at some time in the future. The time value of money
is one of the most important concepts in finance .Most financial decisions involve situations
in which someone pays money at one point in time and receives money at some later time.
Scholars’ View:
1. Time value of money means that the value of a unit is different in different time periods.-
Khanand Jain
2. The valueof an amount of money changes over time. - Iqbal Mathur
3. Time value of money is the principle that money received in the present is worth more than
the same amount received in the future.-Benton
4. Time value is based on the belief that a dollar today is worth more than a dollar that will be
received at some future data.-L.J. Gitman
From the above discussion it can be said that, the time value of money is the concept that
money received today is worth more than the same amount received in the future. In other
words, the present worth of an amount received after some time will be less than an amount
received today.
 Time Preference Theory/Reasons of time value of money
The value of a sum of money received today is more than its value received after some time.
The present value of money received after some time will be less than money received today.
Since money received today has more value and investors would prefer current receipt to
future receipts, the time value of money may also be referred to time preference theory.
1: Risk and Uncertainty: Risk is the variability of return from those that are expected or
chance of financial loss. So, an investor prefers cash at now to future cash receipts.
2: Consumption: Most people have subjective preference for present consumption over
future consumption of goods and services.
3: Inflation: Over the time the purchasing power of money reduces is called inflation. In
inflationary situation a consumer may prefer to have money now.
4: Investment Opportunities: Most individuals prefer present cash to future cash because of
the available investment opportunities to which they can put present cash to earn additional
cash.
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Md. Sajadul Islam Sarker Mobile: 01725-356173
Lecturer(Finance) Email: sajadul.comilla@gmail.com
Dept. of Business Administration Surma Tower, 8 th Floor
Leading University, Sylhet. Room no: 801
TIME VALUE OF MONEY
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5: Required Rate of Return: The funds so invested will earn a rate of return; this would not
be possible if the funds are received at a later time. Thus, time time value of money is of
crucial significance.
 Objectives/Functions/Advantages of Time value of money
The objectives/functions/advantages of time value of money are given below:
1. Calculation of Present Value and Future Value: We can calculate the future value of
present amount and present value of future cash flow.
2. Determination of Interest Rate: The interest rate of loan and deposits are determined
under the concept of time value of money.
3. Calculation of Installment: The loan is repaid at present and deposit is accumulated in
future at installment. To determine the installments time value of money is to be considered.
4. Determination of Time Period: By time value of money, we can find the time period of
certain amount at a fixed rate of interest.
5. Investment Decision: Investment is the cash outflows in current year but cash inflows are
received in future. The investment can be evaluated and decisions are made under the concept
of time value of money.
6. Valuation of Financial Securities: The process of present value that links risk and return
determines the worth of financial securities
7. Lease Financing: Valuing assets and obligations to be capitalized under long term leases
and measuring the amount of lease payments and annual leasehold amortization.
8. Risk Management: Time value of money helps to convert the future value into present at
a specific rate which includes risk as a factor. In risk management, the concept of time value
is mandatory.
9. Project Appraisal: To choice and accept the best project the time value would be helpful.
So it is very necessary to take help from it in evaluating project management.
10. Decision Making: The recognition of time value of money is extremely vital in financial
decision making. If the timing of cash flows is not considered, the firm may make decisions
which may allow it to miss its objective of maximizing the welfare.
 Time Line:
When cash flows occur at different points in time, one is future value and other is present
value, it is easier to deal with them using a time line.
Scholars’ View:
1. Time line showing compounding to find future value and discounting to find present
value.-L.J. Gitman.
2. Time line is a graphical representation used to show the timing of cash flows.-Brigham
&Ehrhardt.
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3. A time line shows the timing and the amount of each cash in a flow stream.-Prasanna
Chandra.
From the above discussion it can be said that, one of the most important tools in time value
analysis is the time line, which is used by analysts to help visualize what is happening in a
particular problem and then to help set up the problem for solution.
 Future value:
Financial values and decisions can be assessed by using either future value or present value
techniques. Future value techniques typically measure cash flows at the end of a projects life.
Scholars’ View:
1. Future value is cash you will receive at a given future date. L. J . Gitman
2. Future value is the value at some future time of a present amount of money. – Van
Horne
3. Future value is the worth at some point in the future of a series of cash flows. –
Henderson
From the above discussion it can be said that, the value at future time of a present amount of
money or a series of payments, evaluated at a given interest rate is called future value. It is
also calledcompound value or terminal value. Future value is central to the concept of time
value of money. To understand future value, it is necessary to understand simple interest,
compound interest, and compounding.
Simple Interest:
Simple interest is interest that is paid (earned) on only the original amount or principal
amount.
Scholars’ View:
1.Simple interest is interest that is paid (earn) on only the original amount.- Van Horne
2.Simple interest occurs only when interest is earned on the original principal. –Hampton
3.Simple interest is computed on the amount of the principal only. –Donald E. Kieso
From the above discussion it can be said that, simple interest is computed on the amount of
the principal only.
Example: Mr. Muaz deposits Tk. 10000 at the rate of 8% simple interest in bank account.
How much account of money would be deposited at end of 5 years?
FV =PV + ( PV × R × N )
¿ 10000+(10000 × .08× 5)
¿ 10000+4000
¿ 14000TK
Compound Interest:
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Compound interest is the interest paid on a loan is periodically added to the principal. As a
result, interest is earned on interest as well as the initial principal. It is interest-on-interest.
Scholars’ View:
1. Compound interest is interest computed on the accumulated interest as well as the original
principal amount.-Benton
2. Interest is earned on interest as well as the initial principal.-Van Horne
3. Compound interest is computed on principal and on any interest earned that has not been
paid or withdrawn.-Donald E. Kieso
From the above discussion it can be said that, compound interest is computed on principal
and on any interest earned that has not been paid.
Compounding:
The future value technique uses compounding to find the future value of each cash flow at the
end of the investments life and then sums these values to find the future value of investment.
The process to calculate the future value from the present value is called compounding.
Scholars view:
1.The procedure by which the future value is found is called compounding. - Benton
2.Compound is the process of finding the future value of series of cash flows. – Pinches
3.Compounding is the process of determining the future value of a cash flow or a series of
cash flows. –Brigham and Ehrahardt
From the above discussion it can be said that, the process of finding the future value of a
payment (or receipt) or series of payments (or receipts), applying the concept of compound
interest is known as compounding.
Mr. Samad deposits TK. 10000 at the rate of 8% compound interest in bank account. How
much amount of money would be deposited at the end of 5 year?
FV =PV (1+ R )
Multi-Period/Frequently compounding:
We have assumed that cash flows occurred once in a year. But in practice, cash flows can
occur more than once a year. So, the interest rates are compounded more than once in a year.
The process of finding the future value of payment (or receipt) when applying the concept of
compound more than once a year is known asmulti-period compounding or frequently
compounding. For example, bank may pay interest on saving account semiannually,
quarterly or monthly
The value of M for different Compounding periods:
Semiannually/Half-yearly 6 Month Interval M=2
Quarterly 3 Month Interval M=4
Bimonthly 2 Month Interval M=6
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Monthly 1 Month Interval M=12
Weekly 7 Day Interval M=52
Daily Everyday Interval M=365
Present Value
The concept of the value is the exact opposite of that of future value. In present value
approach future amounts are converted into present amounts. Present value techniques
measure cash flows at the start of a project life (time zero).
Scholars’ Views
1. Present value is just like cash in hand today. – L. J. Gitman.
2. Present value is the current value of a future amount of money. – Van Horne.
3. Present value is the current value of dollars that will be received in the future. – Benton.
From the above discussion it can be said that, the value of present time of a future amount of
money or a series of payments, evaluated at a given rate is called present value. Present value
also called discounted value. To calculated present value, it is necessary to understand
discount rate and discounting.
A. Discount Rate:
Discount rate is the rate used to calculate the present value from the future value. It is the
interest rate used to convert future values to present values.
Scholars’ view:
1. Discount rate is the rate used to calculate the present value of future cash flows. – Pinches
2. Discount rate is interest rate used to convert future values to the present value. –Van Horne
3. Discount rate is interest rate used in various calculations, such as those to find the present
value of a stream of income. – Benton
B. Discounting:
The present value technique uses discounting to find the value of each cash flow at time zero
and then sums there values to find the investments value today. The process of determining
present value of a future payment (or receipt) or a series of future payment (or receipt) is
known as discounting.
Scholars’ View:
1. Discounting is the process of finding the present value of a future cash flow or a series
cash flows. –Brigham and Ehrhardt
2. The process of determining present value of a future payment or (receipt) or a series of
future payments or (receipt) is called discounting. –I. M. Pandey
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3. Discounting is the finding the present value of dollars that will be received in future. –
Benton
From the above discussion it can be said that, discounting is the process of finding the present
value of a future cash flow or a series of cash flows. The process is actually the inverse of
compounding. Instead of finding the future value of present amounts invested at a given rate,
discounting determines the present value of a future amount, assuming an opportunity to earn
a certain return on the money. This annual rate of return is referred to as the discount rate,
required rate of return, cost of capital and opportunity cost. Discounting is the reverse of
compounding.
Example
At the 5 years from now Mr. saadman will get Tk 1,00,000. If discount rate is 8%, what is the
present value of this amount? What are the present value of the amount he will get at the end
of 10 and 15 years?
Solution
FV
PV = N
( 1+ R )
Where: FV= Future Value = 1,00,000
R= Rate of Interest =8%= .08
N=Number of Years= 5
FV=Present Value?
Now,
FV
PV = N
(1+ R)
100,000
¿
(1+.08)5
100000
¿
1.469
¿ 68074 TK
C. Multi-Period/Frequently Discounting:
Often the discount rates are discount more than once in a year. The process of calculating the
present value of a payment (or receipt), When applying the concept of discounted more than
once a year is known as multi- period discounting or frequently discounting. The value of M
for different discounting is same of multi- period compounding.
Differences between Present Value and Future Value:
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The differences between present value and future value are discussed below:
Topics Present Value Future Value
1. Definition Present value is the current value Future value is the value of some
of a future amount of money or future time of a present amount of
series of payment. money.
2.Concept Present value concept is Future value concept is
discounting. compounding
3. Uses To find present value of future To find future value of present
amount. amount.
4. preference People like present value most. Future value is related with risk so
they would not prefer it than
present value.
5.Amount of Amount of present value is less, if Amount of future value is more, if
Duration duration period is high. duration period is high.
6. Money Value Money value increase. Money value decrease.
7.Interest Rate In lower rate present value is In lower rate future value is
increased and in higher rate present decreased and in higher rate future
value is decreased. value is increased.
8. Calculation Future values are divided by Present value multiply by interest
interest factor. factor.
9. Time line Time line goes to left side from Time line goes to right side from
right hand side. left hand side.
10. Formula FV FV =PV (1+ R)N
PV = N
(1+ R)
Definition of Annuity:
Annuity is a stream of equal periodic cash flows, over a specified time period. these cash
flows can be inflows of returns earned on investments or outflows of funds invested to earn
future returns.
Scholars’ Views:
1. An annuity is a series of equal payments made at fixed intervals for a specified number of
periods. –Besely and Brigham
2. Annuity is a series of equal payments or receipts occurring over a specified number of
periods. – Van Horne.
Type of Annuity
There are two basic types of annuities. One is ordinary annuity and other is annuity due.
Other type of annuity is perpetuity. So, annuity has the following types:
A. Ordinary Annuity:
Ordinary annuity is an annuity for which the cash follow occurs at the end of each period.
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Scholars’ Views:
1. An ordinary annuity is the cash flow occurs at the end of each period.- L. J. Gitman
2. An ordinary annuity is the payment or receipt occurs at the end of each period.- Van
Horne.
So ordinary annuity means that periodic equal payments (or receipts) which are made at the
end of each specified period.
B. Annuity Due:
Annuity due is an annuity for which the cash flow occurs at the beginning of each
period.
Scholars’ Views:
1. An annuity due is the cash flow occurs at the beginning of each period. –L. J.
Gitman.
2. An annuity due is the payment or receipt occurs at the beginning each period. –
Van horne.
C. Perpetuity:
Most annuities calls for payments to be made over some finite period of time.
However, some annuities go on indefinitely, these are calls perpetuity.
Future value of an Annuity:

An annuity is a series of equal payments made at fixed intervals for a specified
number of periods. They can occur at either the beginning at the end of each period.
In computing the future value of an annuity, it is necessary to know:
 The rate of interest.
 The number of compound period.
 The number of periodic or payments.
Present value of an annuity:
Business and individuals frequently engage in transactions in which a series of equal
amounts to be received or paid periodically. Examples of a series periodic receipts or
payments are loan installments sales, bonds, lease contract and pension. These series
of periodic receipts or payments are called annuities. In computing the present value
of an annuity, it is necessary to know:
 The discount rate.
 The number of discount period.
 The amount of the periodic receipts or payments.
Nominal and Effective Annual Rate of Interest:
Both financial manager and investor need to make objective comparisons of loan
costs or investment return over different compounding periods. In order to put interest
rate on a common basis, to allow comparison, we distinguish between nominal and
effective annual rates.
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(A) Nominal Annual Rate of Interest:
The nominal interest rate is conceptually simple interest rate. The nominal interest
rate is the quoted interest rate stated in percentage from on an annual basis and
used to determine the amount interest payment.
Scholars’ Views:
1. Nominal interest rate quoted for a year that has not been adjusted for
frequency of compounding. – Van Horne & Wachowicz
2. Nominal interest rate is contractual annual rate of interest charged by a
lender or promised by a borrower. –L. J. Gitman.
(B) Effective Annual Rate of Interest:

The effective annual interest rate is the interest rate actually paid or earned. The
effective interest rate increases with increasing compounding frequency.
Scholars’ Views:
1. The actual rate of interest earned (paid) after adjusting the nominal rate for factors such as
the number of compounding periods per year. – Van Horne.
2. Effective or true annual rate is the annual rate of interest actually paid or earned. - Gitman.
Nominal Interest Rate versus Effective Interest Rate:

The difference between nominal interest rate and effective interest rate are discussed below:-
Topics Nominal interest rate Effective Interest rate
1. Definition Nominal interest rate is the The effective annual interest
stated annual rate of interest rate is the interest rate
charged by a lender of actually paid or earned.
promised by a borrower.
2. Type It is conceptually simplest It is conceptually
type of interest rate. compounded type interest
rate.
3. Nature It is stated or quoted before. It is adjusted after.
4. Increase Nominal interest rate does Effective interest rate
not change on the context of changes on the context of
time. time.
5. Others name It is also called stated rate, It is also called effective
annual rate, quoted rate. annual rate, true interest rate.
The Rule of 72:
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Rule of 72 is a rule of thumb that finding number of years or interest rate to double or money.
A quick way to handle compound interest problems involving doubling the money makes use
of the rule of 72. It is the more accurate rule than rule of 72.
The Rule of 69:
Rule of 69 is the technique of finding number of years or interest rate to double your money.
It you are inclined to do a slightly more involved calculation, a more accurate rule of thumb
is the Rule of 69. Mr. Prassana Chandra said-
If you are inclined to do a slightly more involved calculation, a more accurate rule of thumb
is the rule of 69, according to this rule of thumb, the doubling period is equal to: 0.35+69÷
intarest rate. So, Rule of 69 is a more accurate rule of thumb, the method of finding number
of years or interest rate to double your money.
Problem-1
What is the future value of Tk. 15000 at the end of 5 years from now? The interest will be
charged at 12%.
Solution
PV= Present value = 15000

R=Interest Rate =12% = 0.12
N= Number of years
FV= Future Value=?
FV =PV (1+ R)N
=15,000(1+0.12)5
=15000(1.12)5
=15000×1.7623
=26,435 TK. Answer.
Problem-2
If you invest 12000 today, how much will you have:
i. ¿ 6 years at 7 percent ?
ii. In 15 years at 12 per cent?
iii. In 20 years at 10 per cent?
If compound annually and semi-annually.
Solution
i. FV = A(1+ R) N =12000(1+0.7)6 =18,009TK.
FV = A ¿=12000 ¿ = 181,009
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ii. FV =12000(1+0.12)15 =12000 ×5.4736 = 65683 Tk .
FV =12000 ¿ = 12000(1.06)30 =68,922 Tk .
iii. FV =12000 ( 1+0.10 )20 =12000 ×6.7275=80,730Tk .

FV =12000 ¿
iv. FV =12000(1+0.12)25=12000 ×17=2,04,00Tk .
FV =12000 ( 1+0.12/2 )2× 25=12000 ( 1+ 0.06 )50=2,21,042 Tk .
Problem-3
Nitol Tata Ltd. Is offering free credit on a car of Tk. 5 lakh. It would pay Tk. 2 lakh
down payment and then the balance at the end of 2nd year. Uttara Motor Ltd. Does
not offer free credit but will give you Tk. 25000 off the list price. If the interest rate is
10%, which offer should you prefer and why.
Solution
Present Value of 1st Offer: Nitol Tata Ltd.
300000
PV =200000+
( 1.10 )2
300000
¿ 200000+
1.21
¿ 200000+2,47,934
¿ 4,47,936 Tk .
Present Value of 2nd Offer: Uttara Motor Ltd.

List Price –Discount
5, 00,000- 25,000
=4, 75,000 Tk.
Decision: Present value of 1st offer: Nitol Tata =4, 47,934 is less than present value of
2nd offer: Uttara motor = 4,75,000. So it should prefer the offer of Nitol Tata.
Problem-4
Unibond Bank offers 8% interest rate compounded annually. If you want to get Tk. 1
lac at the end of 10 years from now, how much money you have to deposit now? How
much money you have to deposit now, if interest is calculated semi-annually and
quarterly compounding?
Solution
Yearly Semi-annually Quarterly
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FV FV FV
PV = PV = PV =
(1+ R)N R N ×M R N ×M
(1+ ) (1+ )
100,000 M M
¿
(1+.08)
10 100,000 100,000
¿ ¿
100,000 .08 10 ×2 .08 10 ×4
¿ (1+ ) (1+ )
(1.08)10 2 4
100,000 100,000 100,000
¿ ¿ ¿
2.1589 (1.04 )20 (1.02)40
¿ 46,320 Tk . 100,000 100,000
¿ ¿
2.191 2.208
¿ 45,541 Tk . ¿ 45,290 Tk .
Problem-5
Suppose that you are planning to deposit Tk. 12,000every year in a bank account.
A. Calculate the future value of Tk. 12,000 deposited in a bank account for next
10 years. The deposit will be made at the end of each of the year, interest rate
is 14%.
B. What will the future value if the deposits are made in the beginning of each of
year?
Solution
( A ) FV = A {¿ ¿
¿ 12,000 {¿ ¿
12,000× 2.707221314
¿ =2,32,048
0.14
( B ) FV = A ( 1+ R ) {1+ R ¿ N −1} ¿
R
¿ 12,000 ( 1+ 0.14 ) {¿ ¿
12,000× 1.14 ×2.707221314

¿
0.14
2,64534 Tk .
Problem-6 Mr. Al-Amin is plan to accumulate 12, 00,000 Tk. 10 years from now for
buying a car. He is deciding to deposit a certain amount of money in a special bank account
that will proved him 9.5% interest per annum.
a) What will be his annual deposit at the ending of each year?

b) What will be his annual deposit at the beginning of each year?
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c) What will be his half-yearly deposit at the beginning?
Solution
A {( 1+ R ) N −1 }
( a ) FV =
R
12,00,000= A ¿ ¿
¿ , 12,00,000=15.56029067 A
12,00,000
¿ , A=
15.56029067
∴ A=77,119 Tk .
A ( 1+ R ) { ( 1+ R )N −1 }
( b ) FV =
R
A ( 1+0.095 ) {( 1+0.95 )10−1 }
1200,000=
0.095
¿ , 1200,000=17.03851828 A
1200,000
¿,
17.03851828
∴ A=70,429 Tk .
R
( c ) FV =A 1+ ( M )
{¿ ¿
0.095
12,00,000= A 1+ ( 2 ){¿ ¿
¿ , 12,00,000= A ( 1+0.075 ) {¿ ¿
¿ , 12,00,000=33.73540215 A
12,00,000
¿, A
33.73540215
∴ A=35,571 Tk .
Problem-7
Your father has promised to present 5 years from now, after completing your post-graduation.
The computer will cost Tk. 50,000 at this time.
A. If interest rate is 9.5% how much amount he has to pay at the end of each year to
accumulate the target amount?
B. If interest rate is calculated bimonthly in a year, how much money is deposited each
time to get that amount?
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C.
Solution
Yearly Bimonthly
FV QA × R R
A= FV a ×
¿¿ M
50,000× .095 A=
¿ {¿ ¿
¿¿ .095
4750 50,000×
¿
¿¿ 6
¿
4750 {¿ ¿
¿ 50,000× .015833
1.5742−1 ¿
4750 ¿¿
¿ 791.67
.5742 ¿
¿¿
¿ 8,272 791.67
¿
1.602026−1
791.67
.602026
¿ 1,3115 Tk .
Problem-8
Mr. Rajib is a businessman. After operating one year business, he has found that he has
earned Tk. 10,000 monthly profit from his firm. He has been offered a proposal by manager
of Sopan Bank Ltd. Of Modhukhali Branch. The bank will give 8% interest rate and he
agrees to invest Tk. 1500 per month. If instalments are deposited beginning of each period,
how much money will be accumulated at the end of 10 years?
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Solution
R
F V a =A 1+ ( M )
{¿ ¿
.08
(
¿ 1500 1+
12){¿ ¿
¿ 1500 ( 1+ .006667 ) {¿ ¿
¿ 1500 ( 1.006667 ) {¿ ¿
1500(1.006667)(2.219728−1)
¿
.006667
1500× .006667× 1.2197728
¿
.006667
1,841.789
¿
.006667
¿ 2,76,255
Problem-9
I. Find the future value of the following investment: The interest rate is 8% per year
compounded annually: Tk. 100 is invested each year beginning one year from now
and continuing through year 10. The proceed are to be withdrawn in years 10.
II. What is the present value of the following cash flows at an interest rate of 12 per cent
per year? Tk. 100 received cash year beginning one year from now ending 10 years
from now.
III. If you wish to have Tk. 10,000 ten years from now, how much money must you invest
today in a saving certificate that pays 8 per cent per year?
Solution
a . FV a= A {¿ ¿
¿ 1OO {¿ ¿
(2.1589−1)
¿ 100 {
0.08
1.1589
¿ 100( )
0.08
¿ 100 ×14.4863
¿ 1449 Tk .
1
b . PV a= A {1− ¿
¿¿
1
¿ 100 {1− ¿
¿¿
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1
100 {1− ¿
¿¿
1
1−
3.1058
¿ 100( )
0.12
1−0.3220
¿ 100( )
0.12
0.678
¿ 100( )
0.12
¿ 100 ×5.65
¿ 565 Tk .
Problem-10
BTI has been doing real estate business for last 20 years. You have selected an
apartment of BTI at green road costing Tk. 25 lakh. You have three alternative offers:
i. Pay full in cash.
ii. Pay 25% of the cost in cash immediately and pay Tk. 2.25 lakh in each
installment for the next ten years.
iii. Pay 40% of the cost in cash and take a loan of Tk. 15 lakh from BHBFC at
15% interest to be repaid in equal monthly instalment over the next 20 years.
Which offers should you accept? If opportunity cost is 12%.
Solution
i. Present value of cash payment ¿ 2500000 Tk .
ii. 25% pay in cash ¿ 2500000 ×0.25
¿ 625000
1
∴ PV a =A {1− ¿
¿¿
1
¿ , 22,5000= A {1− ¿
¿¿
1
∴ A {1−
¿¿
∴ A=1271250 Tk .
Total Present value ¿ 62500+1271250=1896250
iii. Pay 40% of cost in cash ¿ 2500000 ×40 %=10,00,000

1
∴ PV a =A {1− ¿
¿¿
1
¿ , 1500000= A {1− ¿
¿¿
1
¿ , 1500000= A {1− ¿
¿¿
1500000 ×.0125
¿ , A=
1
{1− ¿
¿¿
Page 16
TIME VALUE OF MONEY
T
18,750
¿ , A=
0.9493
¿ 197136
∴ PV 1
A {1−
(1+ R ¿¿¿ N )
a =¿ ¿
R
1
¿ 19751{1− ¿
¿¿
1
¿ 19751{1− ¿
¿¿
¿ 17,93714
Total present value ¿ 100000+1793665=27,93665
Problem-11
A insurance agent is trying to sell you immediate retirement annuity, which for a
single amount paid today, will provide you with Tk. 10,000 at the end to each year for
next 25 years. You currently earn 10% on low-risk investment comparable to the
retirement annuity. Ignoring taxes, what is the most you would pay for this annuity?
Solution
1
PV a= A ( 1+ R ) {1− ¿
¿¿
1
¿ 10,000 ( 1+ .10 ) {1− ¿
¿¿
1
10,000(1.10)(1− )
10.8347
¿
.10
10,000(1.10)(1−.0923)
¿
.10
10,000× 1.10× .9077
¿
.10
9,984.7
.10
¿ 99,847 Tk .
Page 17

TIME VALUE OF MONEY EXPLAINED

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TIME VALUE OF MONEY EXPLAINED

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TIME VALUE OF MONEY

Differences between Present Value and Future Value:

Future value of an Annuity:

(B) Effective Annual Rate of Interest:

Nominal Interest Rate versus Effective Interest Rate:

The Rule of 72:

PV= Present value = 15000

iii. FV =12000 ( 1+0.10 )20 =12000 ×6.7275=80,730Tk .

Present Value of 2nd Offer: Uttara Motor Ltd.

12,000× 1.14 ×2.707221314

a) What will be his annual deposit at the ending of each year?

Total Present value ¿ 62500+1271250=1896250

iii. Pay 40% of cost in cash ¿ 2500000 ×40 %=10,00,000

Total present value ¿ 100000+1793665=27,93665

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