Time Value of Money

anuragsingh.mr@gmail.com
 Time Value of Money

Which would you prefer -- $10,000 today or

$10,000 after 5 years?

If your preference is for , $10,000 today.

You already recognize that there is TIME VALUE TO MONEY!!
 Why is TIME such an important element in
your decision?

TIME allows you the opportunity to postpone

consumption and earn INTEREST.

Concept of
Future Value and Present Value
What is the future value (FV) of an initial
$100 after 3 years, if I/YR = 10%?

0 1 2 3
10%

100 FV = ?
What is the present value (PV) of $100 due
in 3 years, if I/YR = 10%?

0 1 2 3
10%

PV = ? 100
 Drawing time lines

Uneven cash flow stream

0 1 2 3
I%

-50 100 75 50
 Rule of 72
Solving for N:

If sales grow at 20% per year, how long

before sales double?
 Concept of Annuity
• What is the difference between an ordinary
annuity and an annuity due?
Concept of Annuity
 Concept of Annuity
• What is the difference between an ordinary
annuity and an annuity due?
Ordinary Annuity
Annuity Due
 Some Problems
• Find out the FV of Rs 15,000 invested now for a period
of 5 yrs using the time preference rate of 12%.

• Compute the PV of Rs 60,000 to be received each

year for 3 yrs from now using a discount rate of 14%.

• A company promises to pay 6.5 interest annually ,

forever, on Rs 5,000 invested in one of its policies.
Find out the PV of perpetuity annuity.

• Find out the PV of Rs 100 paid in years 2,4,6,8 &10

assuming a 10% discount rate
• You have to choose between 2 saving accounts.
One pays the annual rate of 6.10% compounded
quarterly, whereas the other pays an annual rate
of 6% compounded monthly. Which account will
give you greater value?

• At 10% annual interest, how long does it take Rs

10,000 to grow to become Rs 1,00,000. Find out
the number of periods

• Find out the annual compound growth rate of an

investment if Rs 232 increases to Rs 288 in 3
years.
• Ten years from now Mr X will start
receiving a pension of Rs 300,000 a year.
The payment will continue for sixteen
years. How much is the pension worth
now, if his interest rate is 10%?
• A 20-year-old student wants to save $3 a day for her
retirement. Every day she places $3 in a drawer. At
the end of each year, she invests the accumulated
savings ($1,095) in a brokerage account with an
expected annual return of 12%.

(1) If she keeps saving in this manner, how much will

she have accumulated at age 65?

(2) If a 40-year-old investor began saving in this

manner, how much would he have at age 65?

(3) How much would the 40-year-old investor have to

save each year to accumulate the same amount at
65 as the 20-year-old investor?
• (1) If she keeps saving in this manner, how much will she have accumulated at age 65.

• ANSWER: [Show S2-20 and S2-21 here.] If she begins saving today, and sticks to
her plan, she will have saved $1,487,261.89 by the time she reaches 65. With a financial
calculator, enter the following inputs: N = 45, I/YR = 12, PV = 0, PMT = -1095, then press the
FV button to solve for $1,487,261.89.

• (2) If a 40-year-old investor began saving in this manner, how much would he have at
age 65?

• ANSWER: [Show S2-22 here.] This question demonstrates the power of compound
interest and the importance of getting started on a regular savings program at an early age.
The 40-year old investor will have saved only $146,000.59 by the time he reaches 65. With
a financial calculator, enter the following inputs: N = 25, I/YR = 12, PV = 0, PMT = -1095,
then press the FV button to solve for $146,000.59.

• (3) How much would the 40-year-old investor have to save each year to accumulate the
same amount at 65 as the 20-year-old investor?

• ANSWER: [Show S2-23 here.] Again, this question demonstrates the power of
compound interest and the importance of getting started on a regular savings program at
an early age. The 40-year old investor will have to save $11,154.42 every year, or $30.56
per day, in order to have as much saved as the 20-year old investor by the time he reaches
65. With a financial calculator, enter the following inputs: N = 25, I/YR = 12, PV = 0, FV =
1487261.89, then press the PMT button to solve for $11,154.42.
 You are serving on a jury. A plaintiff is suing the city for injuries sustained
after falling down an uncovered manhole. In the trial, doctors testified that it
will be 5 years before the plaintiff is able to return to work. The jury has
already decided in favor of the plaintiff,
and has decided to grant the plaintiff an award to cover the following items:

(1) Recovery of 2 years of back-pay ($34,000 in 2000, and $36,000 in 2001).

Assume that it is December 31, 2001, and that all salary is received at year
end. This recovery should include the time value of money.

(2) The present value of 5 years of future salary (2002–2006). Assume that the
plaintiff’s salary would increase at a rate of 3 percent a year.

(3) $100,000 for pain and suffering.

(4) $20,000 for court costs.

Assume an interest rate of 7 percent.

What should be the size of the settlement?
The End