Focus on the basics of financial management and Time Value of Money

1. Basics of
Financial
Management
Dr. Yagna Vyas

2. Learning outcome of the
topic
Students are able to get:
the knowledge about the meaning, scope and
objectives of financial management.
Difference between profit-maximization and
wealth-maximization
Sources of finance
Investment decision through TVM

3. Why to study
Finance?
To start the business
List the requirements…..
Decision starts from this point…..

4. Stages of decision
making

5. Stage 1:Deciding about the assets-buy/lease
Stage 2: how much requirement of capital
Stage 3:What about daily expenditures (working
capital)
Stage 4: Sources of finance

6. Meaning
Financial Management deals with effective utilization of
available resources.
Financial Management is concerned with acquiring, financing
and managing assets to accomplish the overall goal of
business enterprise. (maximize shareholders wealth)
Financial Management is a science of money management.
In today’s world positive cash flow is more important than
book profit.
“Financial management is concerned with the managerial
decisions that results in acquisition and financing of short term
and long term credits of the firm.” - Phillippatus

7. Aspects of
financial
Management
Procurement of funds:
Funds can be obtained from various sources like
equity, debentures, bonds, long term and short
term loans, hire purchase or lease, etc. So the
decision making is complex for the company.
Utilization of funds:
Proper utilization of fixed assets
Proper utilization of working capital

8. Objectives of
Financial
Management
Profit Maximization:
Limitations:
1. The concept of profit is vague.
2. It ignores time value of money.
3. It ignores risk.
Wealth Maximization:
1. It is clear(they are focusing cash flows)
2. It considers time value of money (D/F)
3. It considers risk element for evaluation

9. Scope of
Financial
Management
Traditional Approach:
In early 1900
Focus only on procurement of funds.
Modern Approach:
In mid of 1950s
Focus on procurement of funds & allocation of funds.
More focuses on shareholders wealth creation.

10. Financial
Decision
Investment Decision:
Financing Decision:
Long term asset
Short term assets
Dividend Decision: Benefit to shareholders

11. Relationship of Financial Management with
other Discipline
● Economics: two broad areas- Micro economics (controllable environment), Macro
economics (non- controllable environment).
● Accounting: Preparation and presentation of Financial statements which is used by
finance managers for decision making.
● Human Resource: Deals with recruitment , training, compensation, incentive etc used
huge investments related to finance.
● Marketing: for promotion and distribution.
● Research & Development: innovative product required for development in business.
● Production: for production of product fixed assets are required, for purchase of fixed
assets and for working capital requirement of finance.

12. Importance of
Financial
Management
1. Success of promotion.
2. Smooth running of the enterprise.
3. Finance for expansion.
4. Cash planning.

13. Time Value
of Money
Time value of Money is
defined as a concept which
states that purchasing power
of money differs with the
passage of time. In other
words the ruee received
today, is more valuable than a
rupee receivable in future.
Effects of time value of money:
Spendings: with the same amount of money today, we can
buy more goods than in what we can buy in future.
Savings: saving money today has value in future in terms of
fulfilling our future necessities.
Borrowing: to enjoy a benefit of car today, you borrow money
and repay it in future.
Investments: investing money will result maximizing the value
of surplus money.

14. Reasons for
concept
Time Value
of Money:
Uncertain Future: one can control its spendings but he has no
control over his income.
Inflation: Money received today is having more value as
compared to any future date.
Attached Interest Factor: when certain amount is received
and paid at the later date, the value are different.

15. Formula &
Practical
Illustrations
of Simple
Interest
Simple Interest = P*R*N
Q1: Mr. X deposited Rs. 1,000 in a saving bank @ 4% for 5
years . He requested you to give accumulated interest at the
end of 5 years.
Simple Int. = 1000*0.04*5 = Rs. 200
Q2: Mr. X annual savings is Rs. 1,000, which is invested in a
bank savings fund account that pays 5% of simple interest.
Mr. X wants to know his total future value or terminal value at
the end of 8 years period.
FV=1000+ [1000*0.05*8]
=1000+400
=Rs. 1,400

16. Illus of
Simple
Interest
Q3: Mr. X annual savings is Rs. 5,000, which is invested in a
bank fixed deposit account that pays 7% of simple &
Compound interest. Mr. X wants to know his total future
value or terminal value at the end of 10 years period.
P=5,000
I/R=7%
N= 10 years
Simple Int:
FV= 5,000 + [5000*0.07*10]
= 5,000+3,500
=Rs. 8,500
Compound Int:
CV= 5,000[1+0.07]10
= 5000(1.9672)
=Rs. 9,836

17. Compound
Interest
Illustrations
Compound Value= P (1+I)n
Q1: Mr. X is having Rs. 1,00,000 today and he deposited
in bank FD @ 7% compound interest rate for a period of
6 years. Calculate that how the FD would grow?
CV= 1,00,000(1+0.07)6
= 1,00,000 (1.5007)
= Rs. 1,50,070
Q2: Mr. X is having Rs. 5,00,000 today and he deposited
in bank FD @ 9 % compound interest rate for a period of
10 years. Calculate that how the FD would grow?

18. Semi
Annually
Compoundin
g:
CV= P[1+I/m]m*n
P= Principal Amount
I= Interest rate per annum
m= number of times compounding is done
n= maturity period
Q1: How much does a deposit of Rs. 50,000 grow at the end
of 10 years at the rate of 6% interest and compounding is
done semi-annually. Determine the amount at the end of 10
years.
I= 6/2 =3 %=0.03
N= 10*2=20
CV= P[1+I]n
= 50,000[1+0.03]20
= 50,000[1.8061]
= Rs. 90,305

19. Semi annual
Compoundin
g Interest
How much does a deposit of Rs. 1,00,000 grow at the end of
5 years at the rate of 8 % interest and compounding is done
semi-annually. Determine the amount at the end of 5 years.
P= Rs. 1,00,000
I = 8/2 = 4%= 0.04
N = 5*2=10 years
CV= 1,00,000 (1.4802)
= Rs. 1,48,020

20. Quarterly
Compoundin
g Interest
Q1: A firm deposit Rs. 1,00,000 at the end of each year for 4
years at the rate of 8% interest and compounding is done
quarterly basis. What is the compounded value at the end of
4th year?
I= 8/4= 2%= 0.02
N= 4*4=16 years
CV= P[1+I]n = 1,000,000 (1.3728)
= Rs. 1,37,280

21. Compound
Value series
of cash
flows:
Mr. X deposits Rs. 2,000, Rs. 5,000, Rs.8,000, Rs. 10,000 and
Rs. 15,000 in his savings bank account in year 1,2,3,4 & 5
respectively. Interest rate is 4%. He wants to know the future
value of deposits at the end of 5 years.
Yr. Amt. No. of times
Compounded
Compounding
factor (7%)
F.V
1 1,000 4 1.3108 1310.8
2 1,000 3 1.2250 1225
3 1,000 2 1.1449 1144.9
4 1,000 1 1.0700 1070
5 1,000 0 1 1000
5,000 5,750.7

22. Compound
value of
Annuity
(Even Cash
Flow)
ending of
the year
Q1: Mr. X deposited Rs. 1,000 at the end of every year for 5
years at 7% interest. Determine Mr. X value at the end of 5
years.
CV= P1 (1+I)n-1 + P2 (1+I)n-2 + P3 (1+I)n-3 …… + Pn (1+I)n-n
Shortcut Formula:
CVn= P[(1+I)n - 1/I]
= 1000 [ (1+0.07)5 – 1/0.07]
= 1000 (5.7507) – Refer table A2
= Rs. 5, 750.7
CVIFAIn= [(1+I)n - 1/I]; Compound value Int factor Annuity
Table A2

23. Compound
value of
Annuity
(Even Cash
Flow)
ending of
the year
Q2: Mr. X has RD A/c in a bank in which he deposit Rs.
15,000 p.a. In which the bank pays interest of 10% p.a.
Compounded annually. Calculate the amount that he will get
at the end of 8 years.
CVIn = P [(1+I)n -1]/I
=15000 (11.436) –table A2
=Rs. 1,71,540
Q3: Mr. X deposits Rs. 10,000 every six months for 15 years
at 8% p.a. Compounded semi annually, what would he get at
the end of 15th year?
I = 8/2 = 4%
N= 15*2= 30years
CVIn = 10,000 (56.085)
= Rs. 5,60,850

24. Compound
value of
Annuity
(Even Cash
Flow)
ending of
the year
Mr. X has RD A/c in a bank in which he deposit Rs. 15,000
in every quarter. In which the bank pays interest of 8 %
p.a. Compounded quarterly. Calculate the amount that
he will get at the end of 5 years.
I= 8/4 = 2%= 0.02
N= 5*4 =20
Table A2 = 2%, 20 years = 24.297
CVIn= 15000 ( 24.297)
= Rs. 3,6
Mr. X has RD A/c in a bank in which he deposit Rs. 15,000
in every month. In which the bank pays interest of 12 %
p.a. Compounded monthly. Calculate the amount that
he will get at the end of 2 years.
CVIn= 15,000(26.973) = 1%, 24 period –table A2
= 4,04,595 Rs.

25. Compound
value of
Annuity
due(Even
Cash Flow)
Beginning of
the year
Q1: Mr. X deposited Rs. 1,000 at the beginning of every year
for 5 years at 7% interest. Determine Mr. X value at the end of
5 years.
CV= P1 (1+I)n + P2 (1+I)n-1 + P3 (1+I)n-2 …… + Pn (1+I)n
Shortcut Formula:
CVn= P[(1+I)n - 1/I](1+I)
CVIFAIn= [(1+I)n - 1/I]; Compound value Int factor Annuity
Table A2
CV= 1000 (5.7507) (1+0.07)
= 5750.7 (1.07)
=Rs. 6,153.249

26. Compound
value of
Annuity
due(Even
Cash Flow)
Beginning of
the year
Q2: Mr. X deposited Rs. 5,000 at the beginning of every year
for 7 years at 9% interest. Determine Mr. X value at the end of
7 years.
CV= 5000 (9.2004) (1+0.09)
= 46,002 (1.09) =Rs. 50,142.18
Q3: Mr. X has RD A/c in a bank in which he deposit Rs.
15,000 p.a.in the beginning of the year. In which the bank
pays interest of 10% p.a. Compounded annually. Calculate
the amount that he will get at the end of 8 years.
CV= 15000(11.436) (1.10)= Rs. 1, 88,694
Q4: Mr. X deposits Rs. 10,000 in beginning of every six
months for 15 years at 8% p.a. Compounded semi annually,
what would he get at the end of 15th year? 8/2=4%,
15*2=30
CV= 10,000 (56.085) (1.04)
= Rs. 5,83,284

27. Present
Value
P= CV [ 1/(1+I)]n
Q1. An investor wants to find the present value of Rs.
50,000 due 5 years. Interest rate is 10%.
P= 50,000[1/(1+0.10)]5
= 50,000( 0.6209)
= Rs. 31,045
Q2. Mr. X wants Rs. 5,00,000 after 10 year @ 6% interest
How much amount he will invest today?
P= 5,00,000 (1/1.06)10 (table-A3)
= 5,00,000 (0.5584)
= Rs. 2,79,200
Q3. Mr. X wants Rs. 10,000 after 1 years @ 7.5% rate of
discounting. How much he will invest today?
= 10,000 (1/1.075)1 (Table A3)
= Rs. 9302

28. Present
Value with
Even Cash
Flows
PVAn = CIFn [(1+I)n-1/(1+I)n] – If even cash flows
For Uneven Cash Flows:
PV= CIFt
(1+I)t
Q1: Mr X wishes to determine the present value of the
annuity consisting of cash flows of Rs. 40,000 p.a. for 6
years. The rate of interest he can earn from his
investments is 10 %.
PV = 40,000 [(1+0.10)6-1/ (1+0.10)6]- (table A4, 10%,
6years)
= 40,000 (4.3553)
= Rs. 1,74,212

29. Present
Value with
Even Cash
Flows
Q2: Mr. X has to receive Rs. 5000 at the beginning of the
each year for 5 years. Calculate the present value of
annuity due assuming 10 % of interest.
PV= 5000 (PVIFA 10%, 5years)
= 5000 (3.7908)
PV = Rs. 18,954