Concepts of Value and Return by vaishnav

Attribution Non-Commercial (BY-NC)

27 views

Concepts of Value and Return by vaishnav

Attribution Non-Commercial (BY-NC)

- Time Value of Money
- Self Quiz - Simple & Compound (w Answers
- Annuity
- Excel Notes
- Financial Accounting Module 06
- CIP is a great investment for reducing poverty and hunger
- Practice Problems
- trix 2
- Fee Structure 2014-15
- Loan Losses Provision
- Notes on basic finance
- Chap 005
- IRR Economics Interactive Lecture
- COMM298-CLASS03.pdf
- eportfolio assignment
- Financial Management Module-I
- logarithms and car payments
- Case Study
- test1
- Chap05 Buying an Existing Business

You are on page 1of 38

LEARNING OBJECTIVES

Understand what gives money its time value. Explain the methods of calculating present and future values. Highlight the use of present value technique (discounting) in financial decisions. Introduce the concept of internal rate of return.

Time preference for money is an individuals preference for possession of a given amount of money now, rather than the same amount at some future time. Three reasons may be attributed to the individuals time preference for money:

The time preference for money is generally expressed by an interest rate. This rate will be positive even in the absence of any risk. It may be therefore called the risk-free rate. An investor requires compensation for assuming risk, which is called risk premium. The investors required rate of return is:

Would an investor want Rs. 100 today or after one year? Cash flows occurring in different time periods are not comparable. It is necessary to adjust cash flows for their differences in timing and risk. Example : If preference rate =10 percent

An investor can invest if Rs. 100 if he is offered Rs 110 after one year. Rs 110 is the future value of Rs 100 today at 10% interest rate. Also, Rs 100 today is the present value of Rs 110 after a year at 10% interest rate. If the investor gets less than Rs. 110 then he will not invest. Anything above Rs. 110 is favourable.

Two most common methods of adjusting cash flows for time value of money:

Compoundingthe process of calculating future values of cash flows and Discountingthe process of calculating present values of cash flows.

Future Value

Compounding is the process of finding the future values of cash flows by applying the concept of compound interest. Compound interest is the interest that is received on the original amount (principal) as well as on any interest earned but not withdrawn during earlier periods. Simple interest is the interest that is calculated only on the original amount (principal), and thus, no compounding of interest takes place.

7

Future Value

Future Value

In

FV(rate,nper,pmt,pv,type) Where: rate= interest rate. nper= n periods, pmt= annuity value, pv= present value, type= 1 for beginning of the period and 0 for end for end of period.

9

10

11

12

Sinking Fund

13

Example

Present Value

Present value of a future cash flow (inflow or outflow) is the amount of current cash that is of equivalent value to the decision-maker. Discounting is the process of determining present value of a series of future cash flows. The interest rate used for discounting cash flows is also called the discount rate.

15

16

Example

17

18

Example

19

20

End of Year 0 1 2 3

Payment

Interest Principal Outstanding Repayment Balance 900 625 326 3,051 3,326 3,625* 10,000 6,949 3,623 0

21

In most instances the firm receives a stream of uneven cash flows. Thus the present value factors for an annuity cannot be used. The procedure is to calculate the present value of each cash flow and aggregate all present values.

22

23

24

25

26

Example

27

Example

28

29

30

Example

The present value of Re 1 paid at the beginning of each year for 4 years is 1 3.170 1.10 = Rs 3.487

31

Multi-Period Compounding

32

33

Continuous Compounding

34

35

A bond that pays some specified amount in future (without periodic interest) in exchange for the current price today is called a zero-interest bond or zerocoupon bond. In such situations, one would be interested to know what rate of interest the advertiser is offering. One can use the concept of present value to find out the rate of return or yield of these offers. The rate of return of an investment is called internal rate of return since it depends exclusively on the cash flows of the investment.

36

37

38

- Time Value of MoneyUploaded bydadplatinum
- Self Quiz - Simple & Compound (w AnswersUploaded byAnne Mel Bariquit
- AnnuityUploaded byGokul Nath
- Excel NotesUploaded byChandan Shukla
- Financial Accounting Module 06Uploaded byconbano
- CIP is a great investment for reducing poverty and hungerUploaded bycip-library
- Practice ProblemsUploaded byShweta Singh
- trix 2Uploaded byTrixia Cosino
- Fee Structure 2014-15Uploaded byAerospaceBishal Mozart Ghimirey
- Loan Losses ProvisionUploaded byshirinmo
- Notes on basic financeUploaded bydadplatinum
- Chap 005Uploaded byssregens82
- IRR Economics Interactive LectureUploaded bynathim
- COMM298-CLASS03.pdfUploaded byBobMckenzie
- eportfolio assignmentUploaded byapi-282464125
- Financial Management Module-IUploaded byRadhakrishna Mishra
- logarithms and car paymentsUploaded byapi-264152935
- Case StudyUploaded byHarris Javaid
- test1Uploaded byPaoloKhoury
- Chap05 Buying an Existing BusinessUploaded byJonny Jonny
- Financial FunctionsUploaded byRavi Kumar Kampara
- Time ValueUploaded byharshnvicky123
- Chapter 1Uploaded bySonia Gupta Mittal
- InterestTablesFormulaes.pdfUploaded byFauzan Prabowo
- 285741817 FinQuiz Smart Summary Study Session 2 Reading 5Uploaded byaniket
- Topic 2 Time Value of MoneyUploaded bysalman hussain
- Unit - 2 IllustrationsUploaded byRakesh Sri
- Time value of moneyUploaded byEunize Escalona
- Future Value of a Single Amount MCQs _ Accountancy KnowledgeUploaded byTahir Rehman
- Individual Assignment 3Uploaded byMutiara Nuvi Nafisah

- Valuation of Bonds and SharesUploaded byVaishnav Kumar
- Peter DruckerUploaded byVaishnav Kumar
- Reserve Bank of IndiaUploaded byVaishnav Kumar
- entrepreneurship in rural IndiaUploaded bypatilpradnya
- Risk and ReturnUploaded byVaishnav Kumar
- Nature of Financial ManagementUploaded byVaishnav Kumar
- Risk & Return an Overview of Capital Market TheoryUploaded byVaishnav Kumar

- MGI Affordable Housing Full Report October 2014Uploaded byJuan José Gallo Mejía
- EUROMONEY Privatebanking Guide Sept10Uploaded byMartin Jp
- MPM735 Assignment 2 JinendraUploaded byJinendra Sakhare
- Chap 001Uploaded byCarolina Beal
- Excel Financial FunctionsUploaded byMaunilSheth
- Austrian Pension SystemUploaded byhakanistics
- Lotus Greens Corporate Presentation.pptxUploaded byRealEstate-Property-Delhi-NCR
- SAP Business Planning With SAP SEM Sample ChaptersUploaded byjayas2k5
- Indian Mutual Fund Industry Outlook 2015 KPMGUploaded byajayuseless
- Elliott Management Letter to CDK 06.08.16Uploaded byLuisA.Gonzalez
- Questionnaire on InsuranceUploaded bysrujan chowdary
- Nomedik Labs PresentationUploaded byRobert G.L. Newkirk III
- Customer SatisfactionUploaded bytauhid_bog
- weithers.pdfUploaded bysdsdfsds
- REPORTUploaded bynittin surendra
- Altman 2016Uploaded byNehad Yusuf
- Kelly Formula on Capital Growth ModelUploaded byaka2020
- Hofers Cell MatrixUploaded byBliss Heaven
- Bloomberg PresentationUploaded byandy abraham
- Non-Capitalism and FreedomUploaded bymikatic
- Fannie Mae Bold Recommendation 2003Uploaded by46_Ronin
- FDIUploaded byPranav
- Final Feasibility FootPrintsUploaded byEvanSwanson
- Credit RatingUploaded bySanket Mohapatra
- Account Reconciliation Policy (Sample 2)Uploaded bykjheiin
- Spd ManualUploaded byDoxCak3
- Market Efficiency HypothesisUploaded bycrazydownloader
- MBACASE Crack the Case Level 1Uploaded bychris
- Oblicon Articles 1249 - 1258Uploaded byvicmanlawrenze
- 25258216-Internship-Report-on-Bank-Alfalah (1).docUploaded bySyed Zulqarnain Haider

## Much more than documents.

Discover everything Scribd has to offer, including books and audiobooks from major publishers.

Cancel anytime.