Prof. Krutika Mistry
Submitted By :-
Disha Patel 27
Kalpan Patel 28
Section : - C
SUB. :- Financial Management
TOPIC : - Time value of Money (compounding)
Why we need of time value of money?
Why is time such an important element in your
Time allows you the
opportunity to postone consumption
and earn interest…..
It compare the money
between two period….
TYPES OF INTEREST:
Interest earn and paid on
only original amount or principal lent
o COMPOUND INTEREST:
Interest earn and paid on any
previous interest earned as well as on
the principal borrowed.
FUTURE VALUE :
To calculate time value of future
amount there are two way..
future value of lum sum
future value of annuity.
FUTURE VALUE OF LUM SUM AMOUNT:
When an amount is deposited for
a time period at a given rate of
the amount that is accrued at the
end is called the future value of the
So if rs. P is invested for N
period at R% per periods.
(1+r)n is the amount to which an
investment of rs. 1 will grow at the end
of N periods.
It is called FVIF- future value
It is a function of r & N.
It is given in the form of table for
integer value of r & N.
If the FVIF is known, the future
value of any principal can be found by
multiplying the principal by the factor.
o the process of finding the future value
is called COMPOUNDING….
Suhasini has deposited rs. 10000 for 5
years at 10%. Compounded annually..
P= Rs. 10000
=10000 * 1.6105
FUTURE VALUE ANNUITY:
What is annuity?.
It is a series of identical payments
made at equally spaced interval of time.
FVA= A/r[(1+R)N -1](1+r)
Hance FVIFA(r,n)= A(r,n)*(1+r)
It is the future value of annuity that
pays Rs. 1 per period.
For any annuity that pays Rs A per
period, the future value can be found by
multiplying A by the factor.
FUTURE VALUE ANNUITY CONT……
The future value of an annuity due that
makes N payments, is greater than
that of a corresponding annuity, if the
future value is computed at the end of
because each cash flow has to be
computed for one period more.
An annuity that pays forever is
called a perpetuity.
The future value of a perpetuity is
But a perpetuity has a finite present
If David takes an LIC policy with a
premium of Rs. 12000 per year for 25
years, what is the cash value at the
end of 25 years?.
F.V. = 12000*[ (1.10)25- 1 /0.10]
= Rs. 1298181.19