Financial Management

TIME VALUE OF MONEY

Future value of a single amount
FV = PV(1+r)n

If you deposit ₹ 9,000 in an account that pays 7% interest, compounded annually,

how much will you have at the end of
1) 15 years 2) 25 years 3) 50 years
Present Value (PV)
PV = FV / (1+r)n

You are valuing a project that is expected to earn a one-time

cash flow of Rs. 5,00,000 in five years. You estimate a
discount rate of 9%. What is the present value of this cash
flow?
Annuity: Stream of Constant cash flows (receipts or payments) occurring at
regular interval of time

Ordinary Annuity or Deferred Annuity: When cash flows occur at the end of
each period

Annuity Due: When cash flows occur at the beginning of each period
Future Value Annuity

FVAF= ((1+r)n – 1) / r

At the end of each year for 4 years, Karan deposits Rs. 5000 into an investment
account. If the interest rate on the account is 10% per annum compounded yearly,
determine the value of his investment at the end of the 4 years.
Compounded Monthly

If at the end of each month, a saver deposited Rs. 100 into a

savings account that paid 6% compounded monthly, how much
would he have at the end of 10 years?
Present Value Annuity

Calculate the present value of an ordinary annuity that pays Rs.500 at

the end of each year for the next 5 years.The discount rate is 8%.
Future/Compounded Value of a Series of
Payments

Mr.X deposits each year ₹ 500,₹ 1,000,₹ 1500,₹ 2000 and ₹ 2500 in
his saving bank account for 5 years.The interest rate is 5%. He wishes to
find the future value of his deposits at the end of the 5th year.Determine
the sum of money he will have.
 Future/Compounded Value of a Series of
Payments
Calculate the future value at the end of five years of
the following series of payments at 10 % rate of
interest.
R1 = ₹ 1,000 at the end of the first year
R2 = ₹ 2,000 at the end of the second year
R3 = ₹ 3,000 at the end of the third year
R4 = ₹ 2,000 at the end of the fourth year
R5 = ₹ 1,500 at the end of the fifth year
Compound Sum of an Annuity

Mr.X deposits ₹ 2,000 at the end of every year for 5 years in his saving account
paying 5 percent interest compounded annually.He wants to determine how much
sum of money he will have at the end of the 5th year.
Compound Value of an Annuity due

Mr.X deposits ₹ 5,000 at the beginning of every year for 5 years in a bank and
deposits earns a compound interest @ 8% p.a. Determine how much money he will
have at the end of 5 years?
Suppose you deposit ₹ 1,000 annually in a bank for 5 years and your
deposits earn a compound interest rate of 10 percent.What will be the value
of this series of deposits (an annuity) at the end of 5 years?
Calculate present value of the following cash flows assuming a discount
rate of 10%
Year Cash Flows
1 ₹ 5000
2 ₹ 10000
3 ₹ 10000
4 ₹ 3000
5 ₹ 2000
 Present Value of an Annuity due
Mr.A has to receive ₹ 1000 at the beginning of each year for 5 years.
Calculate the present value of the annuity due assuming 10% rate of
interest.
Suppose you expect to receive ₹ 1,000 annually for 3 years, each receipt
occurring at the end of the year.What is the present value of this stream of
benefits if the discount rate is 10 %?
How much should you save monthly (FVAF) -
Periodical Payment calculation (EMI)

A 20 year old wants to retire as a millionaire by the time she turns

70.How much will she have to save at the end of each month if she can
earn 5 % compounded annually, to have ₹ 1,000,000 by the time she is
70 ?
Effective interest rate
What is the effective annual interest rate of a credit card with annual
rate of 36% and interest charged monthly?

loan amortisation schedule

Ques: A firm borrows ₹ 1,000,000 at an interest rate of 15 % and
the loan is to be repaid in 5 equal instalments payable at the end
of each of the next 5 years. Calculate the loan amortisation
schedule.
Deposit in a Sinking Fund
Ques: Futura limited has an obligation to redeem ₹ 500 million bonds 6 years
hence. How much should the company deposit annually in a sinking fund account
wherein it earns 14 percent interest , to cumulate ₹ 500 million in 6 years time?

Ques: Rasheed Furnishings issued bonds worth $500,000 to expand its factory. It
established a sinking fund to retire this debt in three years and made deposits into it
at the end of every six months. If the fund was earning 7% compounded semi-
annually, calculate the size of the periodic payment deposited into the fund.

Ques: A company issued bonds for $850,000 and established a sinking fund to retire
the debt in 15 years. It made deposits at the end of every 6 months into the fund and
the fund was earning 3.55% compounded semi-annually.
Finding the Interest Rate
Ques: An investor deposits ₹ 10,000. Ten years later it is worth
₹17,910. What interest rate did the investor earn on the
investment?
Ques: Suppose you deposit $900 per month into an account
that pays 4.8% interest, compounded monthly. How much
money will you have after 9 months?
Ques: A borrower offers 16 % nominal rate of interest with
quarterly computing. What is the effective rate of interest?