CONTENT

Introduction

 The Value of money changes with time. It is the

concept that money available at the present
time is worth more than the same amount in the
future due to its potential earning capacity.
 i.e. Rs,1000/- today has more value than Rs
1000/- in next year.
 The difference between the value of money at
‘Present’ and its value ‘at a future date’ is
referred to as the ‘Time value of Money’.
  Time value of money is a fundamental concept in financial engineering because it
recognizes that the value of money changes over time.
F E  In financial engineering, which deals with complex financial instruments,
I N investment strategies, and risk management, understanding the TVM is crucial.
N G  It allows financial engineers to make informed decisions, assess risk and maximize
I returns in dynamic and uncertain financial environment.
A N  Financial engineers use techniques such as the risk-adjusted discount rate to
N E assess the risk-return trade-off of different investment opportunities and develop
E strategies to manage risk effectively.
C R  Financial engineers use TVM techniques to evaluate the present value of expected
I I cash flow from projects such as building new facilities, expanding operations, or
A N launching new products.
G  TVM allows financial engineers to analyze the impact of different time horizons
L and interest rates on investment decisions.
 1 Risk and Uncertainty
R
E
A
2 Inflation
S
O 3 Consumption
N
S 4 Investment opportunities
 1) Investment Decision
I
M
P 2) Cost of Capital
O
R 3) Valuation of Assets
T
A 4) Retirement Planning
N
C
5) Budgeting and Financial Planning
E
F
O
R Based on these variables, the formula for TVM is:
M
U
L
A
 Basic Concepts of TVM:

Present Value and Future Value: Discounting and Compounding:

 Describe PV as the current  Discounting calculates the

worth of a future sum of
money and
 FV as the value of an
investment at a specific date
in the future.
present value of future cash
flow,
 While compounding calculates
the future value of present cash
flows.
A 1) Investment Evaluation
P
P
L 2) Valuation of Financial Instruments
I
C
A 3) Merger and Acquisitions
T
I
O 4) Financial Planning and Personal Finance
N
S
5)Capital Budgeting