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Presentation on Time value of money prepared by me

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You are on page 1of 19

Saranga Gunasekara

1

Look ahead

Why time is important ?

Notations

Formulas

Example Calculation

Calculation using Tables

Benefits of the Knowledge of Time Value of

Money

2

Introduction

Definition:

time value of money is the premise that an

investor prefers to receive a payment of a

fixed amount of money today, rather than an

equal amount in the future, all else being

equal.

Source: http://en.wikipedia.org/wiki/Time_value_of_money

3

Time Value of Money

$1,000 in 5 years?

Money received sooner rather than later allows one

to use the funds for investment or consumption

purposes.

All other factors being equal, it is better to have

$1,000 today.

Simply put this is the concept of the time value of

money.

4

Importance of Time Factor

decision?

consumption and earn INTEREST.

5

Calculations based on the time value

of money

received in the future.

Future Value (FV) of an amount invested

(such as in a deposit account) now at a given

rate of interest.

Present Value of an Annuity (PVA)

Future Value of an Annuity (FVA)

6

Notations

‘r’

is the rate at which the amount will be

compounded each period

7

Notations

each compounding period

8

Formulas

value of a present sum

9

Formulas

10

Time value of money

Consider 2 situations

– Option A: You receive Rs. 10,000 today.

– Option B: You receive Rs. 10,000 in 3 years time

– Assume no inflation

– Assume interest rate 10% (Compound Interest)

– Assume no change in any other financial

situation

11

Future Value Calculation

Consider Option A

Let’s calculate the future value of Rs. 10,000

received at the present time.

12

Future Value Calculation

13

Present Value Calculation

years when the interest rate is 10% can be

calculated as Rs. 7513.1

14

Time Value of Money

15

Time Value Calculations using Tables

16

Benefits of the knowledge of the time

value of money

financial benefits of projects

To compare investment alternatives

To analyze how time impacts business

activities such as loans, mortgages, leases,

savings, and annuities.

17

Useful References

http://en.wikipedia.org/wiki/Time_value_of_money

http://www.investopedia.com/

http://www.studyfinance.com/

18

Thank you

19

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