Time value for money

1. Time Value of Money

2. Time Value of Money
• Time Value of Money (TVM) is a fundamental financial concept,
stating that the current value of money is higher than its future
value, given its potential to earn in the years to come. Thus, it
suggests that a sum of money in hand is greater in value than
the same sum of money received in the next couple of years.

4. Time Value of Money
• Time Value of Money (TVM) is the basic financial concept that
advocates how the current value of money is higher than its
value in the future.
• It is the potential earning capacity of the money that decides its
current and future value.
• TVM helps investors make the best investment decisions,
knowing the future returns they should expect from what they
invest.
• Money loses its value over time, which causes inflation affecting
the buying power of the public.

5. Time Value of Money Explained
• Time Value of Money comprises one of the most significant concepts
in finance. The idea focuses on identifying the real value of cash flows
expected in the future due to the business or individual investment
decisions made from time to time.
• For example, A wins a lottery of Rs. 1,00,000 and has two
options to either take a lump sum right at the moment or receive
the same after a year or two. It is obvious for the winner to
choose the first option as the winner can invest that money and
receive Rs. 1,2000 or more in the next two years. But, on the
other hand, if A chooses to go otherwise, it will be the same Rs.
1,00, 000 even after two years.

6. Time Value of Money Uses
• The Time Value of Money concept determines the potential earning
capacity of an amount in the future. It, therefore, helps different
financial sectors to understand and compute the present value and
compare the same with the future value of a particular amount.
Based on the results obtained, they decide whether to invest in a
particular venture, asset, or security.

7. Time Value of Money Uses

8. Time Value of Money Uses
• It helps in comparing the investment alternatives available in the
market. Investors assess the returns and other conditions to make a
final decision on what option to choose.
• Investors choose the best investment proposals based on the
evaluation, considering the TVM.
• Lenders decide the interest rates for loans, mortgages, etc., based on
the present and future value of an amount.
• The value of money, when known, helps in fixing appropriate wages
and prices of products.

9. FORMULA
Here,
•PV = Present value of money
•FV = Future value of money
•i = Rate of interest or current yield on
similar investment
•t = No. of years
•n = No. of compounding periods of
interest each year

10. Example
• For instance, if you invest Rs. 1 lakh for 5 years at 10% interest,
the future value of this one lakh will be Rs. 161,051 as per the
formula. This formula can help you to analyze different
investments over different time periods, enabling you to make
optimal and informed financial decisions.

11. Example
Assume that a sum of ₹10,000 is invested for a period of one year at 10%
interest, which is compounded annually. What will be the future value of
money?
According to the Time value of money formula,
FV= PV x [ 1 (i/n) ] ( nxt)
Hence ,
FV= 10,000 x[ 1 (10/1)] ^( 1x1) = 11,000

12. Time Value of Money in Financial Management
• The time value of money in financial management has a major role as most
of the concepts under financial management base their formulas or
theories related on the concepts of the TVM.
• TVM concepts are used when calculating simple interest for a certain sum
of money invested for a particular period at a given interest rate. The
formula of simple interest is :
Calculation of Simple Interest: F= P + Pi = P (1+i)
FV = P x (1 + R x T)
Where, FV= Future Value
P = Principal amount or Investment Amount
R = Interest rate
T = Number of years

13. Calculation of Simple Interest
For example, the future value of an investment of 8,000 at 10%
rate of interest will amount to:
F = 8,000 x ( 1+ 10/100 ) 1= 8,800 , Hence an investment of
8,000 at 10% rate of interest will amount to 8,800 at the end of
one year.

14. Compounding Value
Just like simple interest, TVM also plays a major role in finding out the compounding value
of a certain sum of money invested for a period of time. The compounding values of an
investment made can be estimated with the help of the following formula:
F = P (1+i)n where,
F= future value
P= Present value and
i= interest rate
For Example, if a sum of 10,000 is invested for a period of 3 years at a rate of interest of
10% compounded quarterly, the equation will look like:
F= 10,000(1+10/100)3= 13,310

15. Present Value
Just like while ascertaining future value using the formula of the time value of money, one can also
find out about the present value from the future value mentioned. The formula for ascertaining the
present value of money is :
P= F/ (1+i)
where ,
P= Present value
F= Future Value
i= interest rate
For example, if the future value of an investment made amount to 13,310 at 10% rate of interest after
2 years then the present value will amount to:
P= 13,310/ (1+10/100)^2= 11,000.
Hence, The present value ascertained of a future value of 13,310 at 10% rate of interest after 2 years,
amount to 11,000