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Time Value of Money

The document discusses the time value of money, which is the concept that money received today is worth more than the same amount in the future due to its potential to earn interest. It defines key time value of money terms like present value and future value. Formulas are provided to calculate future and present value for both single amounts and annuities. An example calculation demonstrates how to determine the present value of $10,000 received in 3 years using a 10% interest rate. Understanding time value of money is important for investment analysis, comparing investment alternatives, and analyzing financial activities involving time.

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3K views19 pages

Time Value of Money

The document discusses the time value of money, which is the concept that money received today is worth more than the same amount in the future due to its potential to earn interest. It defines key time value of money terms like present value and future value. Formulas are provided to calculate future and present value for both single amounts and annuities. An example calculation demonstrates how to determine the present value of $10,000 received in 3 years using a 10% interest rate. Understanding time value of money is important for investment analysis, comparing investment alternatives, and analyzing financial activities involving time.

Uploaded by

api-3816068
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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You are on page 1/ 19

Time Value of Money

Saranga Gunasekara

1
Look ahead

 Definitionof Time Value of Money


 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

 Which would you rather have -- $1,000 today or


$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

Why is TIME such an important element in your


decision?

TIME allows one the opportunity to postpone


consumption and earn INTEREST.

5
Calculations based on the time value
of money

 Present Value (PV) of an amount that will be


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

 PV (Present Value) is the value at time = 0

 FV (Future Value) is the value at time = n

 ‘r’
is the rate at which the amount will be
compounded each period

 ‘n’ is the number of periods


7
Notations

 PV(A) the value of the annuity at time = 0

 FV(A) the value of the annuity at time = n

 ‘A’the value of the individual payments in


each compounding period

8
Formulas

 Present value of a future sum / Future


value of a present sum

9
Formulas

 Present value of an annuity

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

 Similarly using the equation as

the present value of Rs. 10,000 received in 3


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

 For investment analysis – To decide the


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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