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# Time value of money (compounding) finance

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### Time value of money (compounding) finance

1. 1. Faculty Guide:- Prof. Krutika Mistry Submitted By :- Disha Patel 27 Kalpan Patel 28 Section : - C SUB. :- Financial Management TOPIC : - Time value of Money (compounding)
2. 2. INTRODUCTION:  Why we need of time value of money?  Why is time such an important element in your decision?.. Because….  Time allows you the opportunity to postone consumption and earn interest…..  It compare the money between two period…. KALPAN PATEL
3. 3. TYPES OF INTEREST:  SIMPLE INTEREST: Interest earn and paid on only original amount or principal lent and borrowed. o COMPOUND INTEREST: Interest earn and paid on any previous interest earned as well as on the principal borrowed. KALPAN PATEL
4. 4. FUTURE VALUE : To calculate time value of future amount there are two way..  future value of lum sum amount.  future value of annuity. KALPAN PATEL
5. 5. FUTURE VALUE OF LUM SUM AMOUNT:  When an amount is deposited for a time period at a given rate of interest..  the amount that is accrued at the end is called the future value of the original investment.  So if rs. P is invested for N period at R% per periods.  FV= P(1+r)n KALPAN PATEL
6. 6. FVIF:  (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 interest factor.  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 KALPAN PATEL
7. 7. CONTINUE…… 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…. KALPAN PATEL
8. 8. EXAMPLE:  Suhasini has deposited rs. 10000 for 5 years at 10%. Compounded annually..  P= Rs. 10000  N= 5years  r= 10%  FVIF=P(1+r)n = 10000(1+0.10)5 =10000 * 1.6105 =Rs. 16105 KALPAN PATEL
9. 9. 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. KALPAN PATEL
10. 10. 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 N periods.  Why?.... because each cash flow has to be computed for one period more. KALPAN PATEL
11. 11. CONTI……  An annuity that pays forever is called a perpetuity.  The future value of a perpetuity is obviously infinite.  But a perpetuity has a finite present value. KALPAN PATEL
12. 12. EXAMPLE:  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] *1.10  = Rs. 1298181.19 KALPAN PATEL
13. 13. THANK YOU………. KALPAN PATEL