Time Value of Money.pptx_Financial Management

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.

3. 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.

4. 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.

5. 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.

6. Time Value of Money Uses

7. 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.

8. 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

9. 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.

10. 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

11. 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

12. 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.

13. 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

14. P resent 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