This PPT clears your concepts, by solving practical questions!!!!
See Once & I must say You will get benefit.
By Divya Rastogi
Faculty of Management Department
2. CONCEPT
Maximization of shareholders’ wealth is the prime objective of financial management.
For this purpose, financial manager takes decisions relating to financing, investment
& dividends. The investors from their opinion about the firm on the basis of
information about these decisions, In taking these decisions, a financial manager has
to take into account the time factor, i.e,
At what point of time funds raised will have to repaid.
At point of time return on investment will be received.
Whether, it will be received on a constant basis or otherwise etc.
All this requires that the finance manager knows about the various valuation concepts
i.e, compound value concept, present value concept, Annuity concept etc. All these
concepts are basically based on this fact that money has a time value, i.e., a rupee
today is much more valuable than a rupee tomorrow. Thus, the fundamental
principles behind the concepts of time value of money is that “a sum of money
received today is worth more than if the same money is received after some time.
3. continue
Example: if a person invest 10,000 today, he would get more than 10,000 next
year because of interest he receives for his investment i.e., Time value of
money.
4. Techniques of time value of money
The relationship between the present value & the future value arise because
of existence of the interest rate & the time gap. The interest rate & the
time gap between the present money & the future money in fact, tie the
present value & the future value together in a mathematically relationship
as follows:-
FV = PV * (1+r)n
PV = FV / (1+ r)n
FUTURE VALUE/ COMPOUNDING TECHNIQUE : The compounding technique
is used to find out the future value of a present money. The compounding
techniques to find the future value of a present money can be explained
with reference to:
1. The future value of a single present cash flow.
2. The future value of series of cash flow.
5. The future value of single present cash
flow ( Unequal)
The future value depends upon the combination of three values i.e., the
present value, the “r” & the “n”, if any one of these three variables
changes, the future value will also be changed.
FORMULA:
FV = PV * CVF (r,n)
Where , CVF = Compounding value factor
Example: PV = rs. 5,000 n = 10yrs r = 5% p.a
CVF (r,n) = 1.629
FV = PV * CVF (r,n)
FV = 5,000 * 1.629 = Rs. 8145
6. The future value of series cash flow
(equal):
Quite often, a decision may result in a occurrence of cash flow of the
same amount every year for a no. of years. Consequently, instead of a
single cash flow.
Example: PV = rs 1,000 , n = 3 yrs, r = 10%
FV = Annuity amount * CVAF (r,n)
Where, CVAF = Compounding value annuity factor
FV = 1000 * CVAF (10%, 3)
FV = 1000 * 3.310
FV = rs. 3310
7. Present value or Discounting technique
The reverse of compounding technique is known as discounting
technique. As there are future value of sums invested now, calculated as
per the compounding techniques, there are also the present value of
cash flow scheduled to occur in future.
PV = FV / (1+r ) n
The discounting techniques to find out a present value can be explained
in terms of :
1. The present value of future sum. ( Unequal)
2. The present value of future series. ( Equal )
8. The present value of Future sum
(Unequal)
The present value of future money depends upon the three variables i.e.,
the future value, the rate of interest & the time period. These variables
are known as Present value of future sum for a given rate of interest &
time period is denoted as PVF ( r, n).
PV = FV * PVF(r,n)
Example:
FV = 1500, n = 3 yrs, r = 10% p.a PVF (10%, 3) = 0.751
PV = 1500 * PVF (10%, 3)
PV = 1500 * 0.751 = 1126.50
9. The present value of Future series
(Equal)
A decision taken today may result in a series of future cash flow of the
same amount over a period of no. of period.
PV = Annuity amount * PVAF (r, n)
Example: FV = 1500 , n = 3yrs, r = 10% p.a
PV = 1500 * 2.487
PV = 3730.5
