TIME VALUE OF MONEY

PRESENTED BY: ABDUL REHMAN

RAFI
(2020-PS-024)
PRESENTED TO: MR. UBAIDULLAH
 INTRODUCTION

• The time value of money (TVM) is the concept that money's worth
changes over time. It acknowledges that a sum of money today is typically
more valuable than the same amount in the future because money can earn
interest or be invested to grow over time
• TVM is the foundation for various financial calculations, including present
value, future value, and understanding the impact of interest rates and time
on financial decisions.
 FUTURE VALUE

• Financial concept, represents the value of a sum of money at a specific

point in the future, considering its potential for growth or earning interest
over time.
• In other words, it quantifies how much a present amount of money will be
worth in the future, assuming a certain rate of return or interest.
 CONTI…

• Present Value (PV): The initial amount of money you have today, which
you want to calculate the future value for.
• Interest Rate (r): The rate at which your money will earn interest or grow
over time. This rate is typically expressed as an annual percentage.
 CONTI…

• Time Period (n): The number of time periods for which you want to calculate the
future value. This could be in years, months, or any other relevant time unit.
• The formula for calculating the future value (FV) of an investment or sum of
money is:
• FV = PV × (1 + r)^n
• This equation accounts for compounding, which means that the interest earned in
each period is added to the principal, allowing it to grow exponentially over time.
 EXAMPLE

• PV (Present Value) = $1,000

• r (Annual Interest Rate) = 5% or 0.05 (as a decimal)
• n (Number of Years) = 3
• Now, plug these values into the formula:
• FV = $1,000 × (1 + 0.05)^3
• FV = $1,000 × (1.05)^3
• FV = $1,000 × 1.157625
• FV ≈ $1,157.63
 PRESENT VALUE

• Present Value (PV) is the current value of money you expect to receive or
pay in the future, considering that money has different values over time
due to factors like interest or inflation. It helps you figure out how much
that future money is worth in today's terms.
 CONTI…

• PV = FV / (1 + r)^n
• Where:
• PV is the present value.
• FV is the future value or the amount of money to be received or paid in the
future.
• r is the interest rate per period (expressed as a decimal) or the discount rate.
• n is the number of time periods until the future cash flow occurs.
 CONTI…

• FV (Future Value) = $1,000

• r (Discount Rate or Interest Rate) = 5% or 0.05 (as a decimal)
• n (Number of Years) = 3
• Now, apply these values to the formula:
• PV = $1,000 / (1 + 0.05)^3
• PV = $1,000 / (1.05)^3
• PV = $1,000 / 1.157625
• PV = $864.27
 REAL-LIFE APPLICATION

• Investment Valuation
• Retirement Planning
• Business Valuation
• Capital Budgeting
• Insurance Planning
• Real Estate Investment
• Government and Public Finance