# TIME VALUE OF MONEY

The concept of time value of money deals with the fact that an amount of money received in the future is not as valuable as the same amount of money received in the present. This is mainly because of :

An investment of Re 1 today would grow to (1+r) year hence (r being the rate of return earned on (r the investment) . The future is uncertain  Individuals prefer current consumption to future consumption  Capital can be employed productively to generate positive returns.

 In an inflationary period a rupee today represents a greater real purchasing power than a rupee a year hence .

Following concepts would be dealt with:  Present Value Single Amount Series of Cash Flows Uneven Series Annuity .

 Future Value Single Amount Series of Cash Flows Uneven Series Annuity .

PRESENT VALUE .

8638 .9426 .9615 .8885 .9515 2% .8890 .9709 .8227 .9901 2 .8219 5% .Present Value of Re 1 Due at the end of n Period Period 1% 1 .9070 .9151 .9804 .7835 .9524 .9612 .9706 4 .9803 3 .9246 .9238 .9057 3% .9610 5 .8626 4% .9423 .8548 .

8594 2.9410 4 3.9020 5 4.Present Value of an annuity of Re 1 due at the end of n Periods Period 1% 1 .9135 2.7751 3.9901 2 1.4518 5% .9804 1.6299 4.5460 4.7232 3.9524 1.9709 1.8839 3.8534 2% .9416 2.3295 .7135 3% .5797 4% .8077 4.9704 3 2.7171 4.8861 2.9615 1.8286 3.

7000 to be received at the end of 4 years. if the discount rate is 5% 7.000 X 0.8227 = 5758.9 .Find out the present value of Rs.

500 .600 8.500 5.1 2 3 4 5 Find out the present value of the following cash flow occurring at the end of the years (Discount Rate 4%) 2.000 3.800 10.

8890) + (8.40 + 7.800 (10.8219) = 1.500 (5.600 X .9246) + (3.978.629.923 + 3.236.8548) + (8.Present Value of the cash flow is (2.522.9615) + (3.500 X .24 + 8.000 X .95 = 26.69 .800 X .10 + 4.289.500 X .

What is the present value of this benefit if the discount rate is 4% . 8000 for 4 years .Suppose you expect to receive Rs. each receipt occurring at the end of the year.

000 x .8 + 7.4) = 29.000 x .8548) (8.838.20 .039.692 + 7.(8.000 x .396.112 + 6.9246) + (8.8890) + (8.000 x .000 = (7.9615) + (8.

039.20 .6299 29.OR 8.000 X 3.

FUTURE VALUE .

1449 1.1910 4 1.2100 1.3310 1.1664 1.0800 1.0900 1.3108 1.4693 9% 1.2250 1.2597 1.4116 1.1000 1.3605 1.2625 5 1.2950 1.6105 .4026 8% 1.0600 2 1.1236 3 1.5386 10% 1.1881 1.3382 7% 1.0700 1.4641 1.Future Value of Re 1 at the end of n Period Period 6% 1 1.

1000 3.2149 4.0800 3.0000 2 2.2781 4.3100 4.0000 2.6410 6.4399 5.Future Value of an annuity of Re 1 per period for n Periods Period 6% 1 1.0000 2.9847 10% 1.0600 3 3.5061 5.3746 5 5.7507 8% 1.2464 4.0700 3.5731 5.0000 2.1051 .1836 4 4.8666 9% 1.0000 2.6371 7% 1.0900 3.

a compounded annually for 4 years.Future Value of a single Amount  If you have Rs. then what amount u¶ ll get after 5 years 5 8 = 200 x 1 + -----100 . 200 now which u invest @ 8% p.

08) 200 X 1.86 .5 = = = 200 x ( 1.4693 293.

Future Value of an annuity  An annuity is a fixed payment ( or receipt) each year for a specified number of years  The EMI¶s for the loans are common examples of annuities .

Re 1 at the end of second year will grow for 2 years and Re1 deposited at the end of third year will grow for 1 year and lastly Re 1 deposited at the end of 4th year will not generate any interest .Suppose a constant sum of Re 1 is deposited in a savings account at the end of each year for four years at 6% interest  This implies that Re 1 deposited at the end of first year will grow for three years.

06) + 1( 1+1. Value of annuity will be 2 1  1 ( 1 + 1.06) + 1(1+ 1.06) +1  = Rs 4.375 3 .

or 1 X 4.3746 .3746 = 4.

What would be the value of the series of this deposit at the end of 4 years = 5.6410 = 23. 5000 every year in a bank for 4 years to earn a compound interest rate of 10% .If u deposit Rs.000 x 4.205 .