This PPT is made to give basic idea of time value of money, this will explain the simple interest and compound interest also the cash flows through compounding and discounting methods. In the second part of PPT we will take some practical problems and solutions.

1. 1
Time Value of
Money
Name:- Vijay Ramesh Joshi
Twitter ID:- @vrjoshi18
Email ID:- vrjoshi18@gmail.com
Part 1

2. 2
Introduction
The time value of money (TVM) is a concept which says that money received today is
more valuable than money received in future due to its potential earning capacity
This core principle of finance holds that, money can earn interest, any amount of money is
worth more the sooner it is received.
Money grows with the time but its value reduces.
This means money has a time value.
The important factor behind this concept is the INTEREST factor upon which the value or
worth of money is depends.

3. 3
As we know the INTEREST is the important factor which affects the value of money,
interest can be

4. 4
Simple and compound interest

5. 5
For example :- if Rs. 1000/- invested @ 10% for 5years than what is the future of
investment as per SI and CI?
Simple Interest Compound Interest
Principle
Amount
Interest
@10%
Ending
Total
Principle
Amount
Interest
@10%
Ending
Total
1000 100 1100 1000 100 1100
1000 100 1100 1100 110 1210
1000 100 1100 1210 121 1331
1000 100 1100 1331 133 1464
1000 100 1100 1464 146 1610
500 610
Interest is more in case of compounding interest

6. 6
Growth Rate comparison between SI & CI
0
20
40
60
80
100
120
140
160
Year 1 Year 2 Year 3 Year 4 Year 5
SI
CI
Interest under CI is growing at the faster rate year after year as compare to SI

7. 7
Basic techniques of valuation
•This valuation techniques is based on the cash inflows and cash outflows.
•For the future inflows there has to be present outflow.
•In this techniques some times we need to find the future value and some times we need to find
present value.
•For finding the future values of cash flow compounding technique is used whereas discounting
techniques is used for the calculation of the present value.

8. 8
Compounding
of cash flows
FV of Single
Cash Flows
FV of Series of
equal
Cashflows/
Annuity
FV of Uneven
Cash Flows
FV of Multiple
Cash Flows
FV=PV (1+r)n
whereas,
FV=Future Value,
PV=Present Value
r=Rate of Interest
n=Time period
FV An = A [(1-r)n – 1) /
r]
whereas,
FV=Future Value,
PV=Present Value
r=Rate of Interest
n=Time period
FV=R1 (1+r) 1 + R2
(1+r) 2 + R3 (1+r) 3
…. Rn (1+r) n
whereas,
FV =Future Value
R =Payment per
compounding period.
r=Rate of Interest .
FV=PV (1+r) n +
PV (1+r) n +
……….. PV (1+r) n
whereas,
FV=Future Value,
PV=Present Value
r=Rate of Interest
n=Time period

9. 9
Discounting of
Cash Flows
PV of Single Cash
Flows
PV of Series of
equal Cashflows/
Annuity
PV of Uneven
Cash Flows
PV=FV/(1+r)n
whereas,
FV=Future Value,
PV=Present Value
R=Discounted
Rate
n=Time period
PV An = A [(1-r)n – 1) / r(1-r)n]
whereas,
FV=Future Value,
PV=Present Value
r=Discounted Rate
n=Time period
FV=R1 (1+r) 1 + R2 (1+r) 2
+ R3 (1+r) 3 …. Rn (1+r) n
whereas,
FV =Future Value
R =Payment per
compounding period.
r=Discounted Rate

10. 10