TIME VALUE OF MONEY (TVM)

The time value of money is a basic financial concept that holds that money in the
present is worth more than the same sum of money to be received in the future.
This is true because money that you have right now can be invested and earn a
return, thus creating a larger amount of money in the future. Also, with future
money, there is the additional risk that the money may never actually be
received, for one reason or another.

Present Value (PV): Present value, also known as discounted value, is a financial
calculation that measures the worth of a future amount of money or stream of
payments in today’s rupees adjusted for interest and inflation. In simple words it
is the current value of a future amount.

Future Value (FV): Future value is the amount to which a current investment will
grow over time when placed in an account that pays compound interest. In simple
words it is the future value of a present amount.

Annuity: An annuity is a series of payments or receipts at regular intervals for a

specified period of time.

Ordinary Annuity: When payments or receipts occur at the end of each period it
is called ordinary annuity.

Annuity Due: When payments or receipts occur at the beginning of each period it
is called annuity due.

Perpetuity: Perpetuity is a type of annuity that lasts forever, into perpetuity. The
stream of cash flows continues for an infinite amount of time.

Doubling Period: Doubling period is the time taken by an investment to double

itself.

Rule of 72: Doubling period = 72 /i

Rule of 69: Doubling period = (69/i) + 0.35

 Important Calculations:
Single Amount

FV = PV (1 + i)n FV = PV x CVF
FV PV = FV x PVF
PV =
(1 + i)n

Multiple Amounts (Annuity)

Ordinary Annuity

(1 + i)n − 1 FV = P x CVAF
FV = P
i
1 PV = P x PVAF
1− (1 + i)n
PV = P [ ]
i

Annuity due

(1 + i)n −1 FV = P x (CVAF – 1)
FV = P [ ] (1 + i)
i

1 PV = P x (PVAF + 1)
1−
(1 + i)n
PV = P [ ](1 + i)
i

Note:
1. In case of annuity due, calculate:
CVAF for one extra period
PVAF for one period less
2.In case of semi annually & quarterly:
Multiply 'n' by 2 & 4 respectively
Divide 'i' by 2 & 4 respectively
Additional formulas:

1. Present Value of Perpetuity

P
PV =
i
2. Effective rate of interest
i n
Ei = (1 + ) − 1
n
3. Doubling period = 72 /i or (69/i) + 0.35

Terms used:
FV = Future Value
PV = Present Value
i = Rate of Return / Inflation
n = Period or Number of years
P = Annuity Payment or Receipt
PVF = Present Value Factor
CVF = Compound Value Factor
PVAF = Present Value of Annuity Factor
CVAF = Compound Value of Annuity Factor

Calculator Shortcut

PVF 1 ÷ 1 • i = = = = =
Y1 Y2 Y3 Y4 Y5

PVAF 1 ÷ 1 • i = = = = = GT
Y1 Y2 Y3 Y4 Y5

CVF 1 • i X = = = =
Y2 Y3 Y4 Y5

CVAF 1 • i X = = = GT + 2 • i =
Y3 Y4 Y5
Q.1.Sanam invested Rs.1,20,000 at interest of 9 % p.a. What will be the amount after 4 years if
compounded annually?
Solution:
FV = PV (1 + i)n FV = PV x CVF
FV = 120000 (1 + 0.09)4 = 120000 x 1.41158
FV = 120000 (1.09)4 = Rs.1,69,390

FV = 120000 x 1.41158
FV = Rs.1,69,390

Q.2.Ranjan deposited Rs.60,000 at 10 % p.a. What will be the amount after 3

years if compounding is done?
a. Annually
b. Semi Annually
Solution :
a. If compounding is done annually
FV = PV (1 + i)n FV = PV x CVF
FV = 60000 (1 + 0.1)3 = 60000x 1.331
FV = 60000 (1.1)3 = Rs.79,860
FV = 60000 x 1.331
FV = Rs.79860

a. If compounding is done semi annually

FV = PV (1 + i)n FV = PV x CVF
FV = 60000 (1 + 0.1/2)3x2 = 60000x 1.34010
FV = 60000 (1 + 0.05)6 = Rs.80,406
FV = 60000 (1.05)6
FV = 60000 x 1.34010
FV = Rs.80406
Q.3.How much does a deposit of Rs.10,000 grow at the end of 3 years,
if the nominal rate of interest is 12 % p.a. & is compounded 4 times a
year.
Solution:
FV = PV (1 + i)n FV = PV x CVF
FV = 10000 (1 + 0.12/4)3x4 = 10000x 1.42576
FV = 10000 (1 + 0.03)12 = Rs.14,258

FV = 10000 (1.03)12
FV = 10000 x 1.42576
FV = Rs.14,258

Q.4.Find the present value of Rs.12,000 due in 4 years at a compound

interest of 5 % p.a.
FV PV = FV x PVF
PV =
(1 + i)n
= 12000 x 0.82270
12000 = 9872.4
PV =
(1 + 0.05)4

12000
PV =
(1.05)4

12000
PV =
1.21551

PV = Rs.9,873
Q.5.A fixed deposit receipt has a maturity value of Rs 1,33,100.What is
the amount at which fixed deposit receipt has been initially purchased
if compound interest rate is 10 % p.a. & the maturity period is 3 years.
Solution:
FV PV = FV x PVF
PV =
(1 + i)n
= 133100 x 0.75131
133100 = 100000(round off)
PV =
(1 + 0.1)3

133100
PV =
(1.1)3

133100
PV =
1.331

PV = Rs.1,00,000

Q.6.A fixed deposit receipt has a maturity value of Rs.1,46,410.It is

initially purchased at Rs.1,00,000 for 4 years. Calculate the compound
interest rate per annum.
FV
PV =
(1 + i)n

146410
100000 =
(1 + i)4

146410
(1 + i)4 =
100000

(1 + i)4 = 1.4641

4
1 + i = √1.4641
1 + i = 1.1
i = 1.1 – 1
i = 0.1 or 10 %
Q.7.If you deposit Rs.10,000 at the end of every year in a bank for 5
years and the bank is paying is 10 % interest, calculate the amount you
will receive at the end of 5 years.
Solution:
(1 + i)n − 1 FV = P x CVAF
FV = P
i
= 10000 x 6.1051
(1 + 0.1)5 − 1
= Rs.61,051
FV = 10000
0.1

(1.1)5 − 1
FV = 10000
0.1

1.61051− 1
FV = 10000
0.1

0.61051
FV = 10000
0.1

FV = 10000 x 6.1051
FV = Rs.61,051

Q.8.If you deposit Rs.15,000 at the end of every year in a bank for 3
years and the bank is paying 8 %p.a. interest, calculate the amount you
will receive at the end of 3 years.
Solution:
(1 + i)n − 1 FV = P x CVAF
FV = P
i
= 15000 x 3.2464
(1 + 0.08)3 − 1
= Rs.48,696
FV = 15000
0.08

(1.08)3 − 1
FV = 15000
0.08

1.259712− 1
FV = 15000
0.08
 0.259712
FV = 15000
0.08

FV = 15000 x 3.2464
FV = Rs.48,696

Q.9.Sangam invests in a deposit Rs.20,000 every year for 4 years and

the bank is paying 12 % interest. If the payment is made on the first day
of every year, calculate the amount he will receive at the end of 4
years.

Solution:
(1 + i)n −1 FV = P x (CVAF – 1)
FV = P [ ] (1 + i)
i
FV = 20000 x (6.35285 – 1)
(1 + 0.12)4 −1
FV = 20000 x 5.35285
FV = 20000 [ ] (1 + 0.12) FV = Rs.107057
0.12

(1.12)4 −1
FV = 20000 [ ] (1.12)
0.12

1.57352−1
FV = 20000 [ ] (1.12)
0.12

0.57352
FV = 20000 [ ] (1.12)
0.12
FV = 20000 x 4.77933 x 1.12
FV = Rs.1,07,057
Q.10.If you deposit Rs.8,000 at the end of every year in a bank for 4
years and the bank is paying is 9 % interest, calculate the amount he
will receive at the end of 4 years.

Solution:
(1 + i)n − 1 FV = P x CVAF
FV = P
i
= 8000 x 4.57313
(1 + 0.09)4 − 1 = Rs.36,585
FV = 8000
0.09

(1.09)4 − 1
FV = 8000
0.09

1.41158− 1
FV = 8000
0.09

0.41158
FV = 8000
0.09

FV = 8000 x 4.57311

FV = Rs.36,585

Q.11.Ram invests in a deposit Rs.15,000 each year for 3 years and the
bank is paying 15 % interest. If the payment is made on the first day of
every year, calculate the amount he will receive at the end of 3 years.

Solution:
(1 + i)n −1 FV = P x (CVAF – 1)
FV = P [ ] (1 + i)
i
= 15000 x (4.99338 – 1)
(1 + 0.15)3 −1
= 15000 x 3.99338
FV = 15000 [ ] (1 + 0.15) = Rs.59,901
0.15

(1.15)3 −1
FV = 15000 [ ] (1.15)
0.15
 1.52088−1
FV = 15000 [ ] (1.15)
0.15

0.52088
FV = 15000 [ ] (1.15)
0.15
FV = 15000 x 3.47253 x 1.15
FV = Rs.59,901

Q.12.Hrithik wants to obtain an annuity policy that will give a

guaranteed sums of Rs.20,000 per annum for the next three years. If
the company pays its customers interest of 12 % p.a., how much does
he has to put into the policy immediately so that he would have
nothing in the policy at the end of the third year.

Solution:
1
1−
(1 + 0.12)3
PV = P x PVAF
PV = 20000 [ ] = 20000 x 2.40183
0.12
= Rs.48,037
1
1−
(1.12)3
PV = 20000 [ ]
0.12

1
1− 1.40493
PV = 20000 [ ]
0.12

1− 0.71178
PV = 20000 [ ]
0.12

0.28822
PV = 20000 [ ]
0.12

PV = 20000 x 2.40183

PV = Rs.48,037
Q.13.Dhruv wants to obtain an annuity policy that will give a
guaranteed sums of Rs.30,000 per annum for the next five years. If the
company pays its customers interest of 14 % p.a., how much does he
has to put into the policy immediately so that he would have nothing in
the policy at the end of the fifth year.

Solution:
1
1− (1 + i)n
PV = P x PVAF
PV = P [ ]
i
1−
1 = 30000 x 3.43308
(1 + 0.14)5
PV = 30000 [ ] = Rs.102992
0.14

1
1−
(1.14)5
PV = 30000 [ ]
0.14

1
1− 1.92541
PV = 30000 [ ]
0.14

1− 0.51937
PV = 30000 [ ]
0.14

0.48063
PV = 30000 [ ]
0.14

PV = 30000 x 3.43307

PV = Rs.1,02,992
Q.14.Pooja wants to obtain an annuity policy that will give a
guaranteed sum of Rs.1,00,000 per annum for the next five years. If the
company pays its customers interest of 6 % p.a., how much does she
has to put into the policy immediately so that she would have nothing
in the policy at the end of the fifth year.

Solution:
1
1− (1 + i)n
PV = P x PVAF
PV = P [ ]
i
PV = 100000 x 4.21236
1
1−
(1 + 0.06)5
PV = 100000 [ ] PV = Rs.4,21,236
0.06

1
1−
(1.06)5
PV = 100000 [ ]
0.06

1
1− 1.33823
PV = 100000 [ ]
0.06

1− 0.74726
PV = 100000 [ ]
0.06

0.25274
PV = 100000 [ ]
0.06

PV = 100000 x 4.21233

PV = Rs.4,21,233
Q.15.Ganga wants to obtain an annuity policy that will give a
guaranteed sum of Rs.40,000 per annum for the next four years. If the
company pays its customers interest of 9 % p.a., how much does she
has to put into the policy immediately so that she would have nothing
in the policy at the end of the fourth year.(Assume that first annuity is
paid in the beginning of the year)
Solution:

1
1− (1 + i)n
PV = P x (PVAF + 1)
PV = P [ ](1 + i)
i
PV = 40000 x (2.53129 + 1)
1
1−
(1 + 0.09)4
PV = 40000 [ ](1 + 0.09) PV = 40000 x 3.53129
0.09

1 PV = Rs.1,41,252
1−
(1.09)4
PV = 40000 [ ](1.09)
0.09

1
1− 1.41158
PV = 40000 [ ](1.09)
0.09

1− 0.70843
PV = 40000 [ ](1.09)
0.09

0.29157
PV = 40000 [ ](1.09)
0.09

PV = 40000 x 3.23967 x 1.09

PV = Rs.1,41,250
Q.16.Priya wants to obtain an annuity policy that will give a guaranteed
sums of Rs.60,000 per annum for the next six years. If the company
pays its customers interest of 8 % p.a., how much does she has to put
into the policy immediately so that she would have nothing in the
policy at the end of the sixth year.(Assume that first annuity is paid in
the beginning of the year)

Solution:
1
1− (1 + i)n
PV = P x (PVAF + 1)
PV = P [ ](1 + i)
i
PV = 60000 x (3.99271 + 1)
1
1−
(1 + 0.08)6
PV =60000 [ ](1 + 0.08) PV = 60000 x 4.99271
0.08

1 PV = 2,99,563
1−
(1 .08)6
PV =60000 [ ](1.08)
0.08

1
1− 1.58687
PV =60000 [ ](1.08)
0.08

1−0.63017
PV =60000 [ ](1.08)
0.08

0.36983
PV =60000 [ ](1.08)
0.08

PV =60000x 4.62288 x 1.08

Rs.= 2,99,563
Q.17.If you are promised the sum of Rs.10,000 per annum at an interest
rate of 12 % p.a. ,what will be the present value of this perpetual
annuity.

Solution:
10000
PV =
0.12
PV = Rs.83,333

Q.18.If you are promised the sum of Rs.15,000 per annum at an interest
rate of 7 % p.a. ,what will be the present value of this perpetual
annuity.

Solution:
15000
PV =
0.07
PV = Rs.2,14,286

Q.19.If the interest rate is 10 %, calculate doubling period.

Solution:
Rule of 72:

Doubling period = 72 /i

= 72/10

= 7.2 years

Rule of 69:

Doubling period = (69/i) + 0.35

Doubling period = (69/10) + 0.35
= 7.25 years
Q.20.Rahim wants his investment of Rs.5,00,000 to double in 5 years. If
the rate of interest is 14 % will he be able to double it in 5 years?

Solution:
Rule of 72:

Doubling period = 72 /i

Doubling period = 72 /14

= 5.14 years

Rule of 69:

Doubling period = (69/i) + 0.35

Doubling period = (69/14) + 0.35

= 5.28 years.

Since doubling period by both the rules will be more than 5 years, he will not be
able to double the amount in required period

Q.21.A bank offers 8 % nominal rate of interest with quarterly

compounding. What is the effective rate of interest?
Solution:
i n
Ei = (1 + ) − 1
n

0.08 4
Ei = (1 + ) −1
4

Ei = (1 + 0.02)4 − 1

Ei = (1.02)4 − 1
Ei = 1.08243 − 1
Ei = 0.08243 or 8.243 %
 Practice Sums

Q.1.Shraddha wants to invest Rs.2,50,000 in a fixed deposit. If the

interest is compounded semi annually and rate is 13 %, how much will
she get after 8 years?

Q.2.Priya deposits Rs.2,50,000 every year for 6 years in a bank. If the

interest is compounded annually and rate is 11 %, how much will she
get after 6 years?

Q.3.If in the above question the amount is invested at the start of every
year, calculate the amount she will receive after 6 years.
Q.4.Pooja wants to obtain an annuity policy that will give a guaranteed
sums of Rs.1,00,000 per annum for the next five years. If the company
pays its customers interest of 6 % p.a., how much does she has to put
into the policy immediately so that she would have nothing in the
policy at the end of the fifth year.

Q.5.If in the above question annuity amount is received at the start of

every year, calculate present value.
Q.6.Sharma wants to invest Rs.3,60,000 in a fixed deposit. If the
interest is compounded quarterly and rate is 16 %, how much will she
get after 2 years?

Q.7.Pooja wants to obtain an annuity policy that will give a guaranteed

sums of Rs.2,00,000 per annum for the next 6 years. If the company
pays its customers interest of 8 % p.a., how much does she has to put
into the policy immediately so that she would have nothing in the
policy at the end of the sixth year.
Q.8.Priya deposits Rs.1,60,000 every year for 10 years in a bank. If the
interest is compounded annually and rate is 14 %, how much will she
get after 10 years? (Deposits at the start of the year)

Q.9.If you are promised the sum of Rs.20,000 per annum at an interest
rate of 10 % p.a. ,what will be the present value of this perpetual
annuity.

Q.10.If you are promised the sum of Rs.36,000 per annum at an interest
rate of 9 % p.a. ,what will be the present value of this perpetual
annuity.

Q.11.If the interest rate is 15 %, calculate doubling period.

Q.12.Rahim wants his investment of Rs.6,00,000 to double in 4 years. If

the rate of interest is 12 % will he be able to double it in 4 years?(Use
Rule of 69)

Q.13.A bank offers 9 % nominal rate of interest with semi annually

compounding. What is the effective rate of interest?