TIME

VALUE OF MONEY !

1
One dollar today is worth more than one dollar tomorrow.

TIME VALUE OF MONEY.

2
 INTRODUCTION
• TVM help us in knowing the value of
money invested. As time changes
value of money invested on any
project/ firm also changes. And its
present value is calculated by using
“mathematical formula”, which tell us
the value of money with respect of
time. i.e
• The time value of money (TVM) is the
idea that money available at the present
time is worth more than the same
amount in the future due to its potential
earning capacity. This core principle of
finance holds that, provided money can
earn interest, any amount of money is
worth more the sooner it is received.
• Time Value of Money (TVM) is an
important concept in financial
management. It can be used to compare
investment alternatives and to solve
problems involving loans, leases, savings.
 REASON There are certain reason which determine that money has time
value following are the reason

“Risk and Uncertainty Inflation Consumption & Investment

opportunities

Individuals generally prefer

As we know future is never
certain and we can’t
determines the risk involved in
future because outflow of cash
is in our hand as payment
where as there is no certainty
for future cash inflows.
In an inflationary economy, the
money received today, has more
purchasing power than the
money to be received in future.
In other words, a rupee today
represents a greater real
purchasing power than a rupee
in future
current consumption to
future consumption.
An investor can profitably
use the received money
today to get higher return
tomorrow or after a certain
period of time 4
 COMPOUND VALUE

!
• Interest paid(earned) on any previous interest earned as well as on principal
borrowed(lent)
• Interest paid on an investment is periodically added to the principal.so this is interest
on interest or compounding.
 PRESENT VALUE
CONCEPT

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.
 PRESENT VALUE
CONCEPT
(cont.)

 The following general formula can be employed to calculate the present value of a
lump sum to be received after some future periods:

The term in parentheses is the discount factor or present value factor (PVF), and it is
always less than 1.0 for positive i, indicating that a future amount has a smaller present
value.
 Practical Example

Suppose that an investor wants to

find out the present value of Rs
50,000 to be received after 15 years.
Her interest rate is 9 per cent. First,
we will find out the present value
factor, which is 0.275. Multiplying PV = 50,000 × PVF15, 0.09
0.275 by Rs 50,000, we obtain Rs = 50,000 × 0.275
13,750 as the present value:
= Rs 13,750
 THANK
YOU!
-Rutvik Rabadiya
IU2084000029
IMBA [4th Sem.]
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