time value of money

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PRESENTATION ON : :

PRESENTATION ON : “ TIME VALUE OF MONEY” SUBMITTED BY: DEEPAK DHINGRA 09/MBA/08

INTRODUCTION :

INTRODUCTION The value of money received today is different from the value of money received after some time in future. The recognition of the time value of money and risk is extremely vital in financial decision making. An important financial principle is that the value of money is time dependent. This principle is based on the following fue reasons: Inflation Risk Personal Consumption Preference Investment Opportunities

CONT……… :

CONT……… Discounting or Present Value Compounding or Future Value Time Value Of Money

METHODS OF CALCULATING TIME VALUE OF MONEY :

METHODS OF CALCULATING TIME VALUE OF MONEY Simple Interest: Simple interest is the interest calculated on the original principal only for the time which the money lent is being used. Simple interest is paid or earned on the principal amount lent or borrowed. Simple interest is ascertained with the help of following formula: Interest = Pnr Amount = P ( 1+nr) Where, P = Principal ; r = Rate of Interest p.a. ; n = no. of years.

CONT……… :

CONT……… Compound Interest: If interest for one period is added to the principal to get the principal for the next period , it is called ‘Compound Interest’. The time period for compounding the interest may be annual, semiannual, or any other regular period of time. The period after which interest becomes due is called ‘interest period’ or ‘conversion period’. The formula used for compounding of interest income over ‘n’ number of years:

CONT……… :

CONT……… n A = P (1 + i) Where, A = Amount at the end of ‘n’ period ; P = Principal amt. at the end of ‘n’ period ; i = Rate of interest per payment period ; n = Number of payment periods. When interest is payable half-yearly: 2n A = P (1 + i ) 2

CONT……… :

CONT……… Present Value: It is a method of assessing the worth of an investment by inverting the compounding process to give present values of future cash flows. This process is called ‘discounting’. The value of ‘P’ is obtained by solving the following equation: A P = n ( 1+i )

CONT……… :

CONT……… Annuity: An annuity is a cash flow, either income or outgoings, involving the same sum in each period. An annuity is the payment or receipt of equal cash flows per period for a specified amount of time. For e.g., when a company set aside a fixed sum each year to meet a future obligation, it is using annuity. Future value of an ordinary annuity can be ascertained by following formula:

CONT……… :

CONT……… A = P [(1+i)] i Where, A = Annual or future value of annuity ; P = Amount of each installment ; i = Interest rate per period ; n = number of periods.

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