FM1 - Time Value of Money

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Time Value of Money:

Time Value of Money Methods Compounding Discounting

Time Value of Money:

Time Value of Money Future Value Of A Single Flow FV n = PV(1+k) n where FV n = Future Value of the initial flow n years hence PV = Initial Cash Flow k = Annual rate of interest n = Life of investment

Time Value of Money:

Time Value of Money Future Value Of A Single Flow Illustration If one deposited Rs. 10,000 in a bank which is paying a 10% interest per annum, how much would the deposit grow at the end of three years.

Time Value of Money:

Time Value of Money Future Value Of A Single Flow Increased Frequency of Compounding FV n = PV(1+k/m) m * n where FV n = Future Value of the initial flow n years hence PV = Initial Cash Flow k = Nominal rate of interest m = Number of times compounding is done during a year n = Number of years for which compounding is done

Time Value of Money:

Time Value of Money Future Value Of A Single Flow Increased Frequency of Compounding Illustration Find out the compound value of Rs 1000, interest rate being 12 % annum if compounded annually, semi-annually, quarterly and monthly for 2 years.

Time Value of Money:

Time Value of Money Effective vs. Nominal Rate of Interest r=(1+k/m) m - 1 Where, r= Effective rate of interest k= Nominal rate of interest m= Frequency of compounding per year

Time Value of Money:

Time Value of Money Effective vs. Nominal Rate of Interest Illustration Find out the effective rate of interest, if the nominal rate of interest is 12 percent and interest is quarterly compounded.

Time Value of Money:

Time Value of Money Future Value Of Annuity FVA n = A (1+k) n -1) k A = Amount deposited/invested at the end of every year for n years k = Rate of interest( exp in decimals) n = Time horizon FVA n = Accumulation at the end of n years

Time Value Of Money:

Time Value Of Money Future Value Of Annuity Illustration Let us suppose that a firm deposits Rs 5000 at the end of each year for four years at 6% rate of interest. How much would this annuity accumulate at the end of the fourth year.

Time Value of Money:

Time Value of Money Sinking Fund Factor SFF n, i = k (1+k) n -1

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