Money has time value

 A rupee in hand today is more valuable than a rupee

received in the future.
The time value of money concepts can be grouped
into:
 Future Value
 Present Value
It is a process of finding what an investment
today will grow to in the future.
FVn = PV(1+k)^n
Where, FVn - future value after n years
PV - Present value (cash flow today)
k - interest rate
n - No. of years
Rs.1000 deposited in Bank @ 10%
compounded annually
for a period of three years
1st Year Principal Rs.1000
Interest Rs. 100
2nd year Principal Rs.1100
Interest Rs. 110
3rd year Principal Rs.1210
Interest Rs. 121
End of 3rd year Principal Rs.1331
 In other words future value(FV) of Rs.1000 after 3 is
calculated as under :
FV3 = 1000(1+0.10)^3
= 1000(1.10)^3
= 1000(1.331)
= 1331

Thus interest is earned on the principal and interest in the

2nd & 3rd year
Inversely, we can say that present value(PV) of Rs.1331 to be
received after 3 years is:
PV3 = 1331(1/(1+0.10))^3
= 1331(1/(1.10))^3
= 1331(1/(1.331))
= 1000
Thus, present value is the discounted value of
future cash flows at particular rate of interest for n
years.
PVn = FV(1/(1+k)^n)
Where, PVn - present value
FV - future value after n years
k - interest rate
n - No. of years
PV of Cash flows @ 10%:
Year 1 2 3
Amount (Rs.) 100 300 500
PV10% = 100/(1.10)^1 + 300/(1.10)^2 + 500/(1.10)^3
= 91 + 248 + 375
= 714
Annuity means a series of equal payments made at
fixed intervals E.g. auto loans,Housing loans .

Ordinary annuity is assumed to be at the end of a

period e.g. 3 year annuity for Rs. 100 means Rs.100
paid at the end of every year for 3 years.