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Finance For Non Finance  : part3 - time value of money
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Finance For Non Finance : part3 - time value of money

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  • 1. Time Value of MoneyMr. Kaushal Mandaliakaushal@insightHR.co.inwww.InsightHR.co.in+919825300447(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  • 2. What we cover in this module Understanding Time Value of Money Future Value of Lumpsum Amount Future Value of Annuity Present Value of Lumpsum Amount Present Value of Annuity Using EXCEL Formulas for Solving Financial Problems.(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  • 3. Time Value of Money Capital Structure constitutes DEBT (Loan) Equity (Investments) Financial decisions related to capital structure (or Investment) depend on VALUATION Value of idle money goes down as time passes by, hence time has value.(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  • 4. Four Important Calculations Future Value of Single Amount Future Value of Annuity Present Value of Single Amount Present Value of Annuity(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  • 5. Future Value of Single Amount How much something is worth in future…. • Example • Mr Shah has invested Rs 10 Lac in Fixed Maturity Plan for 2 years which gives guaranteed return of 12% compounded annually. What is the maturity value of Mr Shah’s Investment? Ans : Rs 12,54,400(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  • 6. Excel Sheet Calculation(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  • 7. Present Value of Future Sum Present Value is a synoname for Valuation Example Mr Sharma wants Rs 1 Crore when he turns 55 years. He wishes to invest in Reliance Industries Share which is going to give 25% compounding annualized return. Mr Sharma’s current age is 51 years. Find out the amount that Mr sharma need to Invest Today.Ans : 40,96,000(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  • 8. Future Value of Annuity Rs 10,000 Rs 10,000 Rs 10,000 Rs 10,000 Rs 10,000 Rs 10,000 Rs 10,000 Rs 10,000 Annuity Future Value Of Future value of Series of Equal Payment at definite interval. Annuity(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  • 9. Future Value of AnnuityExampleMr. Lakhani wishes to Invest 10 Lacs every year for next two years at the end of each year. He isexpecting 15% interest (compounded annualized). What is the future value of this investment? Ans : 21,50,000ExampleMr. Nair is a government servant and expected to get retired at the age of 58. His contribution toProvident Fund (PF) Account every year at the end of year is Rs 70000. He is getting 9% Compoundedannualized return on his PF Account. What is the Future Value (Maturity Value) of this account whenMr. Nair is retired. Currently Mr. Nair is 42 Years old.(C) InsightHR, www.insightHR.co.in Ans : 23,10,238 Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  • 10. Future Value of Annuity Nper It is the total no of payment periods in the investment Pmt It is the payment made each period. It cant change over the life of investment PV : Assume as ZERO Type 1 : Payment at the beginning of period 0 : payment at the end of the period.(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  • 11. Present Value of Annuity It is used in the valuation of Bond, Securities and Preference Shares. Example Find Present Value of Annuity where Mr Sharma is investing 1 lac every year for next 8 years at the end of year. Assumed Interest rate is 10% compounded annually. Ans : 533492(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  • 12. PV : Excel Calculation(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  • 13. PV : examples Example Face Value of 10% Annual, 2 year bond is Rs 100. Find the valuation of Bond if discount rate is 6%. At the end of 2 years, bond will be redeemed at face value. Ans : 107.33 Example Mr Sharma is investing in share of Wipro Ltd. Current Market Price of Wipro is Rs 500, Face value is Rs 10. Analyst has estimated that wipro will give 250% dividend every year and share price at the end of 8 years will be Rs 650. Should Mr Sharma invest in Wipro for 8 years? Assume discounting rate as 7% Ans : Yes, 527.59(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  • 14. PV : examples 1. As a General Manager, Gujarat Venture Finance Ltd (GVFL), you have received a project from Suzlon Pvt Ltd to open a wind farm at Rajasthan. They wish to have 10 windmills. Each windmill is costing about 5 Crore. Each windmill generates electricity worth Rs 10 Lacs every month. The life of each Windmill is 8 years. The scrap value of each Windmill is Rs 50 Lacs. Suzlon Pvt Ltd requested GVFL to become his investment partner and invest Rs 50 crore. As a general manager of GVFL what should be your decision assuming 7% as discount rate? 2. Mr Suri is planning to buy a dream home. The cost of the home is Rs 30 Lacs. Before applying to loan Mr Suri has analyzed his cash flow and found that he is comfortable paying rs 25000 as EMI for next 15 years. The interest rate on the loan is 9%. Find out how much loan amount Mr Suri can afford?(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  • 15. Loan Ammortization Debt Repayment Schedule Using EXCEL Sheet Formula - PMT(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  • 16. Internal Rate of Return A Discounting rate at which the Net Present Value of a series of cash flow becomes zero. Excel Formula : IRR(C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)
  • 17. (C) InsightHR, www.insightHR.co.in Prepared by, Kaushal Mandalia (kaushal@insightHR.co.in, +919825300447)