Ch 2

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Ch 2

  1. 1. Time Value of Money Rational
  2. 2. In this chapter… <ul><li>Techniques… </li></ul><ul><li>Practical application of compounding and present value techniques… </li></ul>
  3. 3. Time Value of Money… <ul><li>A rupee that is receivable today is more valuable than a rupee receivable in future. </li></ul><ul><li>Put in simple words, to days money is more valuable was future money. </li></ul>
  4. 4. Time Value of Money… <ul><li>Time value of money is an individual’s preference for procession of a given amount of money now, rather than same amount at some future time. </li></ul><ul><li>There are mainly three reasons for the time preference of money: </li></ul><ul><ul><li>Risk </li></ul></ul><ul><ul><li>Preference for consumption. </li></ul></ul><ul><ul><li>Investment opportunities. </li></ul></ul>
  5. 5. Techniques… <ul><li>Future Value </li></ul><ul><li>Present Value </li></ul><ul><li>Multi Period Compounding. </li></ul>
  6. 6. Future Value… <ul><li>Simple Interest. </li></ul><ul><li>Compound interest. </li></ul><ul><li>Annuity. </li></ul><ul><li>Sinking fund. </li></ul>
  7. 7. Simple Interest… <ul><li>SI = (P).(i).(n) </li></ul><ul><li>Where; </li></ul><ul><ul><li>SI = Simple Interest. </li></ul></ul><ul><ul><li>P = Principle Amount. </li></ul></ul><ul><ul><li>i = Rate of Interest. </li></ul></ul><ul><ul><li>n = Number of years for which interest is </li></ul></ul><ul><ul><li>calculated. </li></ul></ul>
  8. 8. Compound Interest… <ul><li>CV = P o (1 + I) n </li></ul><ul><li>Where; </li></ul><ul><ul><li>CV = Compound value </li></ul></ul><ul><ul><li>P o = Principal amount </li></ul></ul><ul><ul><li>I= Interest per annum </li></ul></ul><ul><ul><li>n= Number of years for which compound is done. </li></ul></ul>
  9. 9. Variable compounding periods… <ul><li>CVn = Po </li></ul><ul><li>Where; </li></ul><ul><ul><li>CVn = Compound value at the end of year ‘n’ </li></ul></ul><ul><ul><li>Po= Principle amount at the year ‘0 </li></ul></ul><ul><ul><li>I = Interest rate per annum </li></ul></ul><ul><ul><li>m = Number of times per year compounding </li></ul></ul><ul><ul><li>is done </li></ul></ul><ul><ul><li>n = Maturity period </li></ul></ul>
  10. 10. Future Value of an Annuity… <ul><li>Annuity is a fixed payment each year for a specified number of years. </li></ul><ul><li>Formula is; </li></ul><ul><li>Fn = A </li></ul>
  11. 11. Sinking Fund… <ul><li>Sinking Fund is a fund which is created out of fixed payments each period to accumulate to a future sum after a specified period. </li></ul><ul><li>A = </li></ul>
  12. 12. Present Value… <ul><li>Single Cash Flow </li></ul><ul><li>Annuity. </li></ul><ul><li>Capital Recovery & Loan Amortization. </li></ul><ul><li>Perpetuity. </li></ul>
  13. 13. Single Cash Flow… <ul><li>P = </li></ul><ul><li>OR </li></ul><ul><li>P = F </li></ul>
  14. 14. Present Value of Annuity… <ul><li>P = </li></ul>

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