TIME VALUE OF MONEY

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FINANCIAL MANAGEMENT : 

FINANCIAL MANAGEMENT

TEAM MEMBERS : 

TEAM MEMBERS Sheshmani Upadhyay Anit Kakkar Nand Kishore Sharma

IMPORTANCE OF TIME VALUE OF MONEY : 

IMPORTANCE OF TIME VALUE OF MONEY

What is Time Value Of Money ? : 

What is Time Value Of Money ?

The amount of money received today, is worth more important than the same amount of money, received in future. : 

The amount of money received today, is worth more important than the same amount of money, received in future.

FOR EXAMPLE : 

FOR EXAMPLE Which would you prefer – Rs.10,000 today OR Rs.10,000 in 5 years? Obviously, Rs. 10,000 TODAY

Why is TIME such an important elementin decision? : 

Why is TIME such an important elementin decision? For present need For Re-investment purpose Future uncertainties

Methods of Time Value Adjustment : 

Methods of Time Value Adjustment Compounding Technique :-- -- is used to find out the Future Value (FV) of a Present sum. 2. Discounting Technique :-- -- is used to find out the Present value of a Future sum.

1. Compounding Technique : 

1. Compounding Technique 1. The Future Value (F.V) of a single present cash flow, F.V = P.V (CVF)r,n 2. The F.V of a series/Annuity cash flow. F.V = Annuity Amount*CVAF

WHICH TABLE TO SEE ? : 

WHICH TABLE TO SEE ? Read the question carefully 2. If given, to find F.V/P.V :-- (i)For single sum for certain period of time then – simple F.V/P.V table (ii) For series of sum/annuity amount then -- CVAF/PVAF table ****Rest depend upon the practice.****

1. The F.V of a single present cash flow, : 

1. The F.V of a single present cash flow, Example :- One has to find out the F.V Given :- P.V – Rs.10000 Rate – 5% Time -- 10 years

Slide 13: 

P.V = 10000 C.V.F= 1.629 Put in formula  F.V = P.V*C.V.F 10000*1.629 Ans = Rs.16290

2. The F.V of Annuity cash flow. : 

2. The F.V of Annuity cash flow. ( F.V = Annuity Amount*CVAF ) ANNUITY :--) A finite series of equal cash flow made at regular interval. C.V.A.F -- Compound Value Annuity Factor

Slide 15: 

Example:- ( F.V = Annuity Amount*CVAF ) Find F.V **Suppose that a firm deposits Rs 5,000 at the end of each year for 4 years at 6% rate of interest. How much would this annuity accumulate at the end of the fourth year? Solution:-- We first find CVFA which is 4.3746. If we multiply 4.375 by Rs 5,000, we obtain a compound value of Rs 21,875

2. Discounting Technique : 

2. Discounting Technique 1. The Present Value (P.V) of a single present cash flow :-- P.V = F.V (PVF)r,n 2. The P.V of a series/Annuity cash flow :-- P.V = Annuity Amount*PVAF

Slide 17: 

The Present Value (P.V) of a single present cash flow :-- P.V = F.V (PVF)r,n **Example :-- What is the present value of Rs.10,000 received 5 years from now if your required rate of return is 12%. Solution:--We first find PVF which is 0.567 If we multiply 0.567 to Rs 10,000, we obtain a compound value of Rs 5670

2. The P.V of Annuity cash flow. : 

2. The P.V of Annuity cash flow. **If Unitech expects to receive Rs.5,00,000 for a period of 10 years from a new project it has just undertaken. Assuming 12% rate of interest. What will be the present value of this annuity. Solution:-- The PVAF is 5.65 Multiply (5.65)PVAF with Rs.5,00,000 We get :-- Rs.2825000

conclusion : 

conclusion The concept of time value of money can be applied to a particular amount ,or a series of amount i.e the Annuity amount. It can be used to find out the rate of interest, or number of period of cash inflows/outflows. Thus time value plays an important role in the consideration of any financial decision.

THANK YOU : 

THANK YOU

ANY QUESTION : 

ANY QUESTION

Slide 26: 

Compounding is the process of finding the future values of cash flows by applying the concept of compound interest.