This document discusses different time value of money concepts related to revenue streams, including: 1) The present and future value of a series of regular payments (amount of £1 per annum), using an example of paying £3,000 per year for 3 years at 5% interest. 2) The present value of a series of regular payments (present value of £1 per annum), using an example of estimated £7,500 annual savings from solar panels over 20 years. 3) The annual sinking fund concept to determine how much needs to be set aside each year to amount to a target sum in the future, using an example of replacing an HVAC system that will cost £12,000

1. TIME VALUE OF MONEY 2
REVENUE STREAMS

2. Capital and revenue
• In a previous presentation we considered the present and future
values of a capital sum (a one-off amount of money)
• In this presentation we are going to consider
• Present and Future values
• A series of revenue sums.

3. Amount of £1 per annum
• Earlier, we saw that £10,000
• Could amount to over £12,000
• If it was invested at 5% for five years.
• What if instead of investing £10,000
• We were to invest £1,000 every year (known as per annum)?

4. Example of when to use Amount of £1 pa
• You are buying some equipment, over three years, using a credit
arrangement.
• You are paying £3000 a year over the next three years.
• How much will you have paid over the 3 years, including interest?
• How does this compare to how much it would cost to buy the
equipment in the first place?

5. Amt of £1 pa solution
• The formula for amt of £1 pa is complicated.
• Look it up using tables, or on Excel
• £3,000 pa for 3 years, @ 5% =
• £3, 000 * 3.1525 (from tables) =
• £9,457, say
• £9,500.
• You can compare that with the cost of buying the equipment outright,
without using credit.

6. The Present Value of £1 per annum
• We are paying £15,000 a year in electricity.
• If we installed solar panels and a wind turbine electricity costs, it is
estimated, would halve.
• It would cost £70,000 to install solar panels and a turbine
• The panels and turbine will last 20 years
• Is it worth it?

7. Present Value of £1 pa solution
• Estimated savings =
• £7,500 (half of £15,000) per annum.
• Assume 5% rate of return, over 20 years.
• £7,500 pa * PV £1 @ 5% =
• £7,500 * 12.4662 (from tables)
• = £93, 496, Say £93,500
• If we spend £70,000 we will generate savings worth £93,500
• However, we need to factor in the annual costs of maintaining the
panels and wind turbine.

8. Annual Sinking Fund
• Used to find out
• How much we need to put away every year (sink into a fund)
• To amount to a given sum.
• We would use this if we know we have a forthcoming expenditure.

9. Example of when to use Annual Sinking Fund
• The air conditioning system is coming towards the end of its useful
life.
• You have been advised that you will need to be replaced within the
next seven years.
• It will cost £12,000 to strip out and replace the HVAC system.
• You need to start saving up for that.
• How much should you put away every year to meet that expenditure?

10. Recap
• Amount of £1 - how much will a capital sum amount to after a given
number of years at a given interest rate?
• Present value - how much is a future capital sum worth in today's value
after a given number of years at a given interest rate?
• Amount of £1 per annum - how much will a series of regular payments
amount to after a given number of years at a given interest rate?
• Present value of £1 per annum - what is the value today of a series of
regular payments at a given rate of interest for a given number of years?
• Annual Sinking Fund - how much needs to be invested each year in order to
amount to a given sum, after a given number of years, at a given rate of
interest?