Time value of Money

Compounding: The process of calculating future

value of cash flows:
Single Amount
Annuity

Discounting: The process of calculating present value

of cash flows
Single Amount
Annuity
FV of a Lumpsum

FV=PV(1+r)^n
Future Value of a lump sum
Find the future value of Rs 1,000 placed in a fixed
deposit account at 10% interest for 3 years.

Ans:1331
=1000*1.331
Future value of an annuity: payments made
at EOY
Find the future value of a deposit of Rs 1,000 pa for 3
years at 10% pa. Assume that the deposit is made at
the end of each year

3310
1000+1100+1210
3.310*1000
Find the future value of a deposit of Rs 5,000 for 8
years at 6% pa.
Find the value if the deposit is made for 12 years

7969.24 (1.594*5,000)
10060 (2.012*5,000)
Find the future value of a deposit of Rs 5,000 per
annum for 8 years at 6% pa.
Find the value if the deposit is made for 12 years

Assume deposits at the end of each year.

9.897*5000= 49,485
16.87*5000= 84,350
You plan to go abroad for higher studies after
working for the next five years and understand that
an amount of Rs.2,000,000 will be needed for this
purpose at that
time. You have decided to accumulate this amount by
investing a fixed amount at the end of each year in a
safe scheme offering a rate of interest at 10 percent.
What amount should you invest every year to achieve
the target amount?

FV at 10% for 5 years =6.105

=2,000,000/6.105= Rs. 327,600
How much should Vijay save each year, if he wishes
to purchase a flat expected to cost Rs.80 lacs after 8
years, if the investment option available to him offers
a rate
of interest at 9 percent? Assume that the investment
is to be made in equal amounts at the end of each
year.

FVIFA (9 %, 8 years)=11.028
80,00,000 / 11.028 = Rs. 7,25,426
A finance company advertises that it will pay a lump
sum of Rs.100,000 at the end of 5 years to investors
who deposit annually Rs.12,000. What interest rate is
implicit in this offer?

100,000 / 12,000 = 8.333

FVIFA (24%, 5 years) = 8.048
FVIFA (28%, 5 years) = 8.700

Using linear interpolation in the interval,

24%+((8.333– 8.048)/(8.700 – 8.048))*4%=25.75%
You can save Rs.5,000 a year for 3 years, and Rs.7,000
a year for 7 years thereafter. What will these savings
cumulate to at the end of 10 years, if the rate of
interest is 8 percent?

FV factor 10 years =14.487

FV factor 7 years =8.923

14.487*5000+8.923*2000 =90,281
A leading bank has chosen you as the winner of its
quiz competition and asked you to choose from one
of the following alternatives for the prize: (a) Rs.
60,000 in cash immediately or (b) an annual payment
of Rs. 10,000 for the next 10 years. If the interest rate
you can look forward to for a safe investment is 9
percent, which option would you choose?

=2.367*60000 =1,42,020

15.192*10000 =1,51,920
 Doubling Period
Rule of 72

72/interest rate = doubling period

In how many years will an amount double if the
interest rate is 6% pa?

72/6=12

If an amount doubles in 9 years,what is the interest

rate pa?
72/9 =8%
If you deposit Rs.5,000 today at 12 percent rate of
interest in how many years (roughly) will this amount
grow to Rs.1,60,000 ? Work this problem using the
rule of 72–do not use tables.

72/12=6
=160000/5000=32=2^5
6*5=30 years
 Present Value of Money
An amount of money received today is worth more
than the same amount of money received in future
 PV of a lumpsum
What is the present value of Rs 10,000 receivable at
the end of 8 years if the discount rate is 10%?
8%?

10000*.466=4660
10000*.540=5400
 PV of an annuity
What is the PV of a 5 year annuity of Rs 10,000 at 10%?
What is the PV of an 8 year annuity of Rs 10,000 at 10%?

=.909+.826+.751+.683+.621=3.79
=.909+.826+.751+.683+.621+.564+.513+.466=5.33

3.79*10,000=37,900
5.33*10000=53,300