Note: This transcription document is a text version of the upGrad videos present in this session. It is 
not meant to be read independently, but can be used to complement your video watching 
experience. 
 

 
 
Speaker: Srinivas Mantripragada 
 
It is imperative to understand the intricacies of the business decisions which impact a company's 
growth. So, how does any company grow?  
 
Every company grows by investing in resources to achieve business growth, goals like expanding 
productive capacity, updating technological as well as manpower resources, etc.  
 
All these business goals are undertaken via the medium of projects. Every project requires some 
sort of investment over a period of time after which it starts giving returns. All these investments 
also come with risks which have the ability to hamper your company's growth curve.  
 
As a business manager, when you decide whether any project is worth undertaking or an 
investment is worth making, you would want to estimate if the returns on the investment would be 
greater than the costs incurred.  
 
Additionally, the returns also should be at least equal to or more than what the company's average 
returns are. To evaluate an investment on both these parameters, there are several project 
evaluation techniques.  
 
Most of these techniques are built on the same fundamental concept known as the time value of 
money, which explains how the value of money changes over time.  
 
You will learn about the concept in greater detail in the first session of this module. Every project 
evaluation technique evaluates the projects by analysing whether the project will add value to the 
company or not.  
 

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A way of doing that ease to identify whether the cost of funding that investment is lesser than the 
return on the investment.  
 
So, in order to know about the cost of funding and investment, you will learn how does a firm raise 
capital to fund its investments.  
 
Every source of capital has a cost, which is the return that the providers of capital expect. Once you 
know about the cost associated with the sources of capital, you have a foundation to take a call on 
which resources should the company invest in for growing its business and increasing its 
profitability.  
 
In this module, you will gain a better understanding of how growth-related investment decisions are 
taken by companies after analysing the quality of investment through certain key project evaluation 
techniques.  
 
Any project evaluation is incomplete without factoring in the external risks associated with the 
project. There are various risks associated with your project which have the ability to hamper the 
intended effect of the investment.  
 
Analysing these risks can help you make a final check on whether you should invest in that 
particular project.  
 
So, in the final segment of this module, you will understand about the different types of risks and its 
impact on the project.  
 
We will further look at some techniques by which we can evaluate these risks. So, what are we 
waiting for? Let's dive right in to the first session of this module. 
 
 

 
 
Speaker: Puja Aggarwal 
 
Welcome to the first session on the introduction to the time value of money. Suppose that a friend 
of yours has borrowed rupees 10,000 from you, and given you two options, either he pays back the 
entire amount immediately or he keeps the money for two years and then pays back rupees 10,000. 
 
Obviously, you will prefer to receive your money back immediately. Wouldn't you? If you receive the 
money now, then you can make multiple uses of the cash received.  
 

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You can decide to put it in a fixed deposit and earn interest, or you can invest the money in your 
business and get an even higher rate of return, rather than just waiting to receive the money after 
two years. This is the time value of money.  
 
The concept of the time value of money tells you that the money earned today will be worth more in 
the future than what its value is at present. This is due to the potential earning capacity of the given 
amount of money.  
 
Let's apply the concept of the time value of money in a real-world scenario. You will calculate the 
value of an actual sum of money at a certain time in the future.  
 
Suppose that you have rupees 10,000 with you, which you would like to invest. You approached a 
bank that told you that they would offer a 5% interest if you opened a fixed deposit with them, and 
the deposit can be withdrawn at the end of the year one.  
 
So, how would you know that what amount you would receive at the end of one year? Let's look at 
the calculation.  
 
Your investment is rupees 10,000. Since your investment would grow by 5% a year, your fixed 
deposit balance at the end of year one would be 10,000 multiplied by 1 plus 5% which would be 
10,500.  
 
Thus, your investment of rupees 10,000 would grow to rupees 10,500 after a year. This 10,500 is 
known as the future value of your investment.  
 
Let's take a look at this situation from another angle. You need to have rupees 10,500 in your bank 
account to enable you to pay an insurance premium next year.  
 
The same bank is offering 5% interest. So, how much investment would you have to make presently 
so that after one year, the target amount of rupees 10,500 is achieved.  
 
Your target at the end of year one is rupees 10,500 and the bank offers an interest rate of 5%. So, if 
X is the present investment required, X multiplied by 1 plus 5% is your total savings after one year. 
 
So, if you solve for X, you will get X equal to 10,000. Hence, you would need to make an investment 
of rupees 10,000 to get rupees 10,500 in your bank account after a year, assuming an interest rate 
of 5%.  
 
These rupees 10,000 amount is called the present value of the investment. Hence, the present 
value is the value of the investment made on the current date, while future value is the value of the 
sum of money on a future date.  
 

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This example talked about an investment made for a single year. Let's look at the present and the 
future values of the investments made for multiple years.  
 
Now instead of one year, let's say that you wanted the amount of rupees 10,500 in your bank 
account after five years at the same interest rate of 5%. What would be your amount of investment 
in this case?  
 
As you already know, if X is the amount of your present investment, then X multiplied by 1 plus 5% 
would be the value of your investment at the end of year one.  
 
Similarly, the value of your investment at the end of year two would be 1 plus 5% multiplied by the 
value of the investment at the end of year one. 
 
Thus, the value of an investment at the end of year five would be X multiplied by 1 plus 5% raise to 
the power of five.  
 
Putting this formula and your target amount of rupees 10,500 in an equation would solve the value 
of X, which would be rupees 8,227.  
 
So, your present value of investment would be rupees 8,227 and at the end of year five, you can 
expect to see rupees 10,500 in your account.  
 
You saw that the investment grew in value over time with the interest applied not only to the initial 
investment but also to the interest amount from the previous year.  
 
Hence, the interest of 5% at the end of year two would be applicable to the future value of your 
investment at the end of year one. This phenomenon of how the value of your investment 
generates additional earnings over time is called compounding.  
 
Similarly, the process of determining the present value of an investment giving you a particular 
return in the future is known as discounting, and the bank interest rates used to calculate 
discounting is known as the discount rate.  
 
Let's try to generalize the formula to calculate the future value after N years for an investment made 
at present. Present value of investment is equal to future value divided by 1 plus I raised to the 
power N, where I is equal to rate of interest and N is equal to number of years.  
 
Speaker: Dhaval Doshi 
 
So, what was your key takeaway from this segment? You were introduced to the concept of the 
time value of money, which shows you how the capital in hand today is more than it's worth if 
received in the future.  

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Thus, if your friend gives you two choices to either pay your money back now or pay after a period 
of five years, you would choose the first option as you can reinvest the amount received from your 
friend and earn returns on it.  
 
Further, you gained an understanding of the present and future values of an investment, and also 
learned how to calculate them for a single cashflow.  
 
Now let's take this further and see how to calculate the present and future values for multiple cash 
flows. 
 

 
 
Speaker: Srinivas Mantripragada 
 
Let's start with a simple case. Let's say Rajiv, your friend is considering investing in a fixed deposit 
and does not know how it works. His friends are saying, or you are one of them and saying, the 
interest is compounded quarterly by Indian banks.  
 
He goes to a branch of state bank of India who informed him that if he invests rupees one lakh for 
one year, the amount he will get at the end of the first year will be 1,06,032, the maturity value of 
the FD, this is the maturity value.  
 
And that the rate of interest is 5.90% per annum compounded quarterly. Now he doesn't know how 
this 1,06,032 has come above.  
 
He understands 5.90%. He understands that he needs to invest one lakh, but he really is struggling 
to ascertain how 1,06,032 has come above.  
 
This is where compounding comes in. Indian banks compound the fixed deposit amounts on 
quarterly basis. That is, the amount you deposit at the beginning of the first quarter earns interest 
for one quarter.  
 
Let's say you invest on 1st of January, interest at this specified rate will be calculated for three 
months, and it will be added to the amount of deposit.  
 
Now, your total amount, which comes up at the end of the first quarter, that is 31st March is a little 
higher. By how much? By the amount of interest.  
 

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That amount, total amount becomes the amount which will earn interest for the second quarter, 
which means you are earning interest for the second quarter, not only on the original amount that 
you invested, but also on the amount of interest for the first quarter.  
 
This is called interest on interest or compounding. And this is how the banks in India calculate. 
However, if the deposit is not compounded quarterly, what happens?  
 
Let's take Rajeev's case again. Rajeev invests one lakh rupees on 1st of January, and the amount of 
interest is only paid annually. That means compounded annually. And he deposits only for one year.  
 
He will not get anything more than 5.90% because there is no compounding applicable. But now let 
us assume that he deposits for two years.  
 
First year, he will get 5.90%, that is 5,900. The amount at the end of first year will be 1,05,900. 2nd 
year, he will get interest of 5.90% on 1,05,900, this is compounding.  
 
We can calculate these by using formula, which is given by fixed deposit future value is equal to the 
amount of deposit, in our case, fixer deposit multiplied by eighth term, that means open the bracket 
1 plus R divided by N raised to the power T multiplied by N.  
 
What is R? The rate of interest per annum. What is N, in both the cases, R divided by N, T into N. 
Both Ns are the same.  
 
This is the number of times the amount is compounded or interest is compounded, which in our 
case is four, quarterly. If it is compounded half yearly, the N will be two.  
 
T is the number of years. Hence, the future value in our case will be one lakh multiplied by the term. 
Now, you know what the term is? Term is bracket open, or parenthesis open, 1 plus 5.90% divided 
by four, parenthesis closed raised to the power one into four, gives you the same 1,06,032.  
 
Now let us look the same case from a different perspective. Now assume that if Rajeev is not aware 
that if he invests one lakh, he will get 1,06,032 in the future.  
 
What will he do? He will look at 1,06,032 and try to work backwards to arrive at one lakh. What is he 
trying to do? Simply he's calculating the present value for a given future value amount.  
 
When we use the future value, what we said? Future value is equal to the amount of deposit, that is 
the present value, one lakh into a particular term, that is, FV is equal to PV into a term.  
 
Now what that term is? We know, and we'll come back to that once again. So, future value is equal 
to PV into the term. Now to find the PV, what do you do? You simply divide future value by the term.  
 

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Now if you do this, in this case, we know FV is 1,06,032, and we'll divide that by the term. Once 
again, the term is nothing but one plus R by N raised to the power one into N. You will get one lakh. 
So, what have we done? We have calculated the present value. 
 

 
 
Speaker: Srinivas Mantripragada 
 
Now let's look at Rajiv's case once again. Now having understood Rajiv wants to use this 
knowledge that he has so far acquired on time value of money, to build a fund of five lakhs at the 
end of four years.  
 
Let's say he wants to buy a car, and he knows that the rate of interest is 5.90%, which is the SBI rate 
of interest. He wants to calculate how much should he invest now.  
 
What is he wanting to calculate? The present value because he knows the future value. Future 
value is the five lakhs at the end of 4 years. He wants to calculate the present value. Well, let's go 
straight to excel and find out how we can use this.  
 
Simply which function will you use? You will use the PV or the present value function because you 
have already been given an FV or future value.  
 
So, PV, parenthesis open, 5.90 divided by 4, 16, 0, minus 5 lakhs, 0 parenthesis close, is equal to, 
now the Excel will return the value as 3,95,572.  
 
It means that you need to invest 3,95,572 at the beginning of year one. Let us say today, let's say 
he's investing on the 1st of April on a particular year, and four years later he will get rupees five 
lakhs.  
 
On 1st of April, that is today, he will invest 3,95,572 and earn, keep on earning interest of 5.90% 
compounded quarterly. At the end of four years, he will get rupees five lakhs. 
 

 
 
Speaker: Dhaval Doshi 
 
A project has multiple cash flows associated with it. So, it is important for you to know how to 
estimate the present worth of multiple cash inflows in the future. So, let's start by evaluating the 
present worth of a periodical set of investments.  
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Speaker: Puja Aggarwal 
 
Suppose that you want to buy a machine worth rupees one crore and you expect it to produce 
goods worth rupees 25 lakhs every year for five years, which is it's estimated useful life.  
 
Now to buy the machine, you have decided to take a loan of rupees one crore from a bank, which is 
charging you an interest rate of 10% on loan.  
 
You need to analyse whether buying the machine would be beneficial for you. Let's break down the 
cashflow of five years into yearly cash flows.  
 
So, the first cash flow would look like an investment made at present, which gives you a return of 
twenty-five lakhs at the end of the first year.  
 
Thus, the present value for the first cash flow would be rupees 25 lakhs divided by 1 plus 10% which 
is rupees 23 lakhs. Similarly, the second cash flow would look like an investment made at present 
and would give you a return of rupees 25 lakhs at the end of the second year.  
 
So, now we would use the formula you learned to calculate the present value for N time periods. 
Thus, the present value for the second cash flow would be 25 lakhs divided by 1 plus 10%, raised to 
the power two which is rupees 21 lakhs.  
 
Similarly, the present value for the third cash flow would be rupees 19 lakhs, and the present value 
for the fourth cash flow would be rupees 17 lakhs.  
 
Finally, the present value for the fifth cashflow would be rupees 15 lakhs. In order to find out the 
total present value, you simply add the present value for all the cash flows.  
 
Thus, the total present value is rupees 95 lakhs. Thus, we can conclude that the present value of 
the returns from the machine would be rupees 95 lakhs. It is five lakhs less than the cost of the 
machine.  
 
So, the rational decision in this case would be not to buy the machine. In this example, the machine 
had generated returns of rupees 25 lakhs every year. This concept of fixed sum of money paid or 
received every year is known as annuity.  
 
Now you have learned how to calculate present and future values of an annuity. However, if you 
want to gain speed and automation, excel has a host of inbuilt functions that can make the 
calculations easier for you. Let's explore this further. 
 

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Speaker: Srinivas Mantripragada 
 
Excel, which has the present value or PV and an FV or a future value function, especially designed 
to calculate these respective values of a particular cash flow.  
 
So, let's see how both these functions are used. Let's first jot down the cash inflows to be received 
in the next five years. Type PV, which means present value after the equal to sign or operator in an 
empty cell.  
 
Notice that the format for the PV function mentions three things, rate, NPER, PMT. Keep in mind the 
order of values in the format of both the functions.  
 
Here, rate signifies the discount rate. NPER stands for the number of payments and PMT represents 
the value of each payment, each payment being the cash flow in that respective year.  
 
Now let's input the values. Here, rate is equal to 10%. NPER or the number of payments is 5 and 
PMT is 25 lakhs. So, the present value appears to be 95 lakhs.  
 
This is the present value of the cash inflows over the five-year period, each with 25 lakhs at a 
discount rate of 10%.  
 
Now suppose you have decided to invest an amount of rupees 25 lakhs for the next five years into 
an investment you expect to grow at 10% every year.  
 
What is the amount you will receive at the end of fifth year? Remember, now you're looking at a 
value in the future at the fifth-year end.  
 
Now you have to calculate the future value at the end of five years. Let's use Excel once again to 
solve this. Similar to the PV or present value function, Excel also has an FV or future value function 
to estimate the future value of annuities, annuity being a fixed amount of cash inflow every year.  
 
Let's jot down the cash inflows in the next five years. Type FV, after the equal to operator in an 
empty cell. Similar to the PV function, the FV function also has a rate NPER, PMT in its format, all of 
which you already know, from your PV function usage.  
 
As we did in the case of PV, keep the order of the values in mind and remember what each 
argument stands for. Now let's input the values.  
 

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Again, rate is equal to 10%, NPER is equal to five, that is the number of payments, and PMT or the 
value of each payment is equal to 25 lakhs.  
 
So, the future value of the cash flows at the end of year five appears to be rupees 1.53 crores. 
 

 
 
Speaker: Srinivas Mantripragada 
 
Let us know consider what an annuity is. Rajiv wishes to generate a Corpus of 25 lakhs at the end 
of five years itself because he wants to buy an apartment.  
 
His issue is how much should he invest on a monthly basis to generate the desired amount given 
the interest is 5.90% per annum compounded monthly. This time it is compounded monthly.  
 
This can be calculated as follows. A is equal to FV divided by a particular term and that term is 
further divided by R. What is this A? This A is my monthly deposit. That is the amount of deposit that 
Rajiv wants to invest.  
 
FV is the future value, which in our case is 25 lakhs. We know R, so let's look at these and plot them 
into the formula and calculate how much Rajiv will require to invest.  
 
R, as we know is 5.90%, and we said it is being compounded monthly. Now to explain the concept, 
we have taken the compounding on a monthly basis instead of quarterly that we have looked at 
earlier.  
 
The rate of interest is obviously 5.90% divided by 12 gives you 0.492% on a monthly basis. What are 
the number of months? The number of months is 60 in this case. Why? Five years into twelve.  
 
Solving this, we get A is equal to FV 25 lakhs divided by this term by substituting R and N, you will 
get, A is equal to 35,924 which means Rajiv invest 35,924 at the end of every month, he will get 25 
lakhs after five years at the rate of interest, which is compounded monthly.  
 
This is a very powerful tool to accumulate a certain amount of money to meet different needs of 
individuals.  
 
The same thing can be done by corporates as well, but corporates would typically not keep money 
idle at such low rates of interest because they want to earn a higher rate of interest because they 
carry a lot of risk. 
 

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Speaker: Srinivas Mantripragada 
 
In reality, the chances of the cashflows remaining fixed over a period of time are quite bleak. Then 
how will you determine the value of your investment if the cash flows are uneven? Let's consider 
this example. 
 
Suppose you want to buy a machine for your company that is to use for producing goods for four 
years. The annual production can be sold for a certain amount with the motive of making a profit.  
 
You want to ascertain your maximum investment in the machine to make a profit. The cash flows 
from the machine will differ each year, and hence, you cannot apply the present value function 
directly to the cash flows.  
 
Let's learn how to arrive at the present value of such uneven cash flows using Excel. The first 
method involves calculating the present value or PV of each cash flow individually.  
 
The cash flows for four years are rupees 75 lakhs for the first year, rupees is 90 lakhs for the 
second year, rupees 115 lakhs for the third year and rupees 120 lakhs for the fourth year, with a 
discount rate of 10%.  
 
All the cash flows will be received at the end of each year. The total PV of all the cash flows will be 
the sum of the individual present values of the cash flows for year one, year two, year three and 
year four.  
 
The next step involves finding the present value factor or PVF for each of the cash flows. PVF is 
calculated as, one divided by, open brackets, one plus rate of interest, close the brackets, raised to 
the power time period.  
 
In our example, the PV factor for the first year is calculated as one divided by 1 plus 10% to the 
power of one. For the second year, it is calculated as one divided by 1 plus 10% raised to the power 
two.  
 
For the third year, it is one divided by 1 plus 10% raised to the power three. And for the fourth year, 
as one divided by 1 plus 10% to the power four.  
 
After this, each of the cashflows is multiplied by this PVF or present value factor to arrive at the 
present value. Here, multiplying 75 lakhs which is the cash flow for the first year by PV factor of 
0.9091 will give you the present value of 68.18.  

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Similarly, you can calculate the PV of the cashflows for the rest of the three years. Thus, the total PV 
for the four years will be the sum of the PVs for the four years which is equal to rupees 310.92 lakhs.  
 
The second method to derive the PV of uneven cashflows in using the NPV function. Type NPV 
after the equal to operator in an empty cell in Excel.  
 
Notice that the format for the NPV function mentions the rate and the range of values. Keep in mind 
the order of the values in the format. Enter the rate as 10 percent, like in above example, followed 
by a comma and then select the range of the cells from years one to year four.  
 
Close the function using a parenthesis. This will give you the PV of the cash inflows as 310.92 lakhs. 
Therefore, to make a profit, you must buy a machine of a value lower than 310.92 lakhs.  
 
Now let's calculate the future value for this uneven cashflow at the rate of 10%. To calculate the 
future value of the cash flows at the end of year four, you will need to calculate the future value or 
FV of cashflow occurring at end of each year.  
 
The total future value at the end of year four would be the sum of the future values of the cashflows 
at the end of years one two, three and four.  
 
The next step in was finding the compound value factor or CVF for each of the cash flows. The CVF 
is the number using which the future value of a cash flow is determined.  
 
It is calculated as, open brackets, one plus rate, close brackets, raised to the power time period. 
Hence, the future value factor for the first year is calculated as 1 plus 10% in parenthesis raised to 
the power three.  
 
For the second year, 1 plus 10 percent in parentheses again, both of them raised to the power two. 
And for the third year, one plus 10% raised to the power one.  
 
And for the fourth year, 1 plus 10% raised to the power zero. Note that for the first year, the time 
period is three because the first year cashflow is received at the end of the first year, and hence 
needs to be compounded for three years.  
 
On the other hand, the cashflow for the fourth year is already at the end of fourth year. Hence, you 
do not need to compound it.  
 
After this, each of the cash flow is multiplied by this compound value factor or CVF to arrive at the 
future value. The CVF for year one is, in parenthesis, 1 plus 10% raised to the power three, which 
gives you 1.331.  
 

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Hence, multiplying 75 by 1.331 will give you a future value of 99.825. Similarly, you can obtain the 
future value of the cash flows for the rest of the three years.  
 
Thus, the total future value is equal to the sum of the future value of the four years, which is equal to 
455.225. So, you learned the total PV and FV of uneven cash flows are the sums of the PV and the 
FV of the individual cash flows respectively. 
 

 
 
Speaker: Srinivas Mantripragada 
 
Now, as we said, the above principles can be applied in a variety of ways with some variation in day 
to day life, to decide following.  
 
Some of the examples, how much to invest monthly or quarterly or annually to receive a desired 
amount at the end of the period.  
 
Like we saw, Rajiv wants to get five lakhs at the end of four years. How much should he invest now? 
But this is one-time investment. Mind you, this is one-time investment.  
 
But at the same time, if he were to find out how much we can invest on a quarterly basis, annually 
or monthly, the formula can be used for that purpose also. This is called recurring deposit.  
 
Another case is where you decide how much should be invested now as a lump sum to keep 
receiving a fixed amount, monthly or quarterly or annually.  
 
That means you invest a certain amount now and keep receiving a fixed amount in the future, either 
on a monthly basis or quarterly basis or semi-annually or annually. This is called annuity. 
 
The third is how much do we invest on a monthly or quarterly basis or annually or whatever time 
period to develop or generate a Corpus by the end of a specified term, which Corpus will then 
generate fixed monthly or periodic payments. This is a combination of a recurring deposit and an 
ending. 
 
 
 
 
 
 
 

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