This document discusses the concept of time value of money, which is important in financial management. It defines present value and future value, and provides formulas and examples to calculate future value based on the present value, interest rate, and number of periods. Benefits of understanding time value of money include analyzing investment alternatives and business activities involving loans, mortgages, savings, and annuities. Sample problems demonstrate calculating present value and future value using formulas and tables.

2.  Definition of Time Value of Money
 Why time is important ?
 Present Value and Future Value
 Formulas
 Sample Calculation
 Calculation using Tables
 Benefits of the Knowledge of Time Value
of Money
 Sample Problems

3. Time Value of Money (TVM) is an important
concept in financial management.
It can be used to compare investment
alternatives and to solve problems involving
loans, mortgages, leases, savings, and
annuities.

4.  Which would you rather have -- $1,000
today or $1,000 in 5 years?
 Money received sooner rather than later
allows one to use the funds for investment
or consumption purposes.
 All other factors being equal, it is better to
have $1,000 today.

5. TIME allows one the opportunity to
postpone consumption and earn
INTEREST.

6. Present Value (PV)- the value now of a sum of
money expected to be received in the future.
 Computing the present value of a sum is
known as discounting.

7. Future Value is the amount of money that an
investment made today (the present value) will
grow to by some future date.
 Computing the future value of a sum is
known as compounding.

10.  Let’s calculate the future value of 10,000
received when the interest rate is 10%?.

12. Example 2:
You can afford to put $10,000 in a savings account today
that pays 6% interest compounded annually. How much
will you have 5 years from now if you make no
withdrawals?
PV = 10,000
i = .06
n = 5
FV = 10,000 (1 + .06)5
= 10,000 (1.3382255776)
= 13,382.26

13. using the equation:
the present value of 10,000 received in 3 years
when the interest rate is 10% ?
= 7513.1

14. Example 1:
The present value of 10,000 received in
3 years when the interest rate is 10%?
PV =?
FV = 10,000
r = 10% or .10
n = 3

15. PV =?
FV = 10,000
PV = (10,000)/((1+.10)3)
=(10,000)/((1.1)3)
=(10,000)/(1.331)
= 7513.1

18.  For investment analysis
 To decide the financial benefits of projects
 To compare investment alternatives
 To analyze how time impacts business activities
such as loans, mortgages, leases, savings, and
annuities.

20. Example 2: Another financial institution
offers to pay 6% compounded
semiannually.
How much will your $10,000 grow to in five
years at this rate?

21. Interest is compounded twice per year so you
must divide the annual interest rate by two to
obtain a rate per period of 3%. Since there are
two compounding periods per year, you
must multiply the number of years by two to
obtain the total number of periods.

22. PV = 10,000
i = .06 / 2 = .03
n = 5 * 2 = 10
FV = 10,000 (1 + .03)10
= 10,000 (1.03) 10
= 10,000 (1.343916379)
= 13,439.16

23. Present Value of 25,000 received in five
years when the interest rate is 5%?