KIRAN C K

ASSISTANT PROFESSOR

Unit 2 Time Value of Money

Meaning of Time value of Money
It refers to “time has got a value”. The rupee value keeps on changing over a period of time. The
purchasing power of a rupee, is either increase or decrease but never remains constant.
In other words, the concept of time value of money refers to the money received today is different in
its worth from the money receivable at some other time in future.
Need for Time value of Money
a. Reinvestment opportunities
b. Uncertainty
c. Inflation
d. Personal consumption preference
Techniques of Time value of Money
There are basically two techniques for calculation of time value of money:
1. Compounding technique
2. Discounting technique (present value technique)
1 Compounding technique: This concept is used to find out the future value of present money. It is the
same as the concept of compound interest, wherein, the interest earned in preceding year is reinvested
at the prevailing rate of interest for the remaining period.
Thus, the accumulated amount (principal + interest) at the end of a period becomes the principal
amount for calculating the interest for the next period.
The compounding technique is to find out the future value (FV) of the present worth of money, can be explained
with reference to:
a. The future value of a single present cashflows
b. The future value of annuity/series of even cashflows
c. The future value of multiple (uneven) cashflows
Meaning of Future Value: It refers to the value of an asset or cash at a particular date in the future which is
equivalent to the value of a specified sum at present. The future value can also be explained as the amount of
money which will be reached by a present investment as a result of its growth in the future.
n
FV= PV (1+ r)

Where, FV= Future value

PV= Present value
r = Rate of interest
n = Nor of years

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 KIRAN C K
ASSISTANT PROFESSOR

a. The future value of a single present cashflows:

i. In case of annual compounding
FV= PV (1 + r) n

Simple problems:
1. Find out the future value of a sum of Rs 2,000 after a year with a time preference money of
12%
2. X invests Rs 1,000 for 3 years in a savings account that pays 10% interest per annum. Calculate
the future value
3. Find out the future value Rs 1,600 received after two years at 10% time preference rate
4. Calculate the future value for Rs 20,000 deposited in bank for a period of 5 years at 12% PA.
Given (1.12)5 =1.762
5. Arun makes a deposit of Rs 10,000 in a bank which pays 8% interest compounded annually for
8 years. You are required to find out the amount to be received by him after 8 years

ii. In case of multiple compounding period or intra compounding

FV = PV (1 + r) mn
m
- When interest is payable half yearly
FV = PV (1 + r)2n
2
- When interest is payable quarterly
FV = PV (1 + r)4n
4
- When interest is payable monthly
FV = PV (1 + r)12n
12
- When interest is payable daily
FV = PV (1 + r)365n
365

Simple problems:
1. Calculate the future value of Rs 4000 is invested for 4 years and the interest on it is
compounded at 12% PA half yearly. Find out the compounded value or future value.
Given (1.06)8 =1.594
2. Calculate the future value of Rs 7000 invested for 5 years at a rate of interest of 15%
compounded half yearly. According to compound table compound value factor for Re.1 in 5
years at rate 15%. Given (1.075) 10 = 2.0610
3. Mrs. Paru deposit Rs 6000 in a bank for 5 years and the interest on it is compounded at 10%
PA. If interest is calculated quarterly. Given (1.025) 20 = 1.637 calculate the future value
quarterly

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 KIRAN C K
ASSISTANT PROFESSOR

4. Calculate the future value of Rs 9000 is invested for a period of 5 years at 12 % PA interest
compounded quarterly. Find out Future Value Given (1.03) 20 = 1.806

b. The future value of annuity/series of equal cashflows

FVA= R(1+i) n-1 + R(1+i) n-2 + R(1+i) n-3 + R(1+i) n-4

where, FVA= Future value of annuity
R = Even Cash flows
i = interest rate
n = nor of year
Simple problems:
1. Calculate the future value of annuity of Rs 8000 deposited at the end of each year at 6% for a
period of 5 years.
2. Mr. kumar deposits Rs 6000 at the end of every year for five years and the deposit earns
compound interest @12% PA. Determine how much money he will have at the end of 5 years
3. Calculate the future value of annuity of Rs 4000 deposited at the end of each year at 6% for a
period of five years
4. Mr. Manju deposits Rs 3000 at the end of every year for five years in his savings account
paying 6% interest compounded annually. He wants to determine how much sum of money he
will have at the end of five years.

c. The future value of multiple (uneven) cashflows

FVUECF = R1(1+i) n-2+ R2(1+i) n-2+ R3(1+i) n-3+ R4(1+i) n-4
Where, FVUECF = Future value of uneven cash flow
R1, R2, R3, R4 = Uneven cash flow
i = interest rate
n = nor of years
Simple problems:
1. Calculate the future value of the following cash flow if it is invested @ 8% interest PA
At the end of 1st year Amount deposited Rs 2000
At the end of 2nd year Amount deposited Rs 4000
At the end of 3rd year Amount deposited Rs 6000
At the end of 4th year Amount deposited Rs 8000

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 KIRAN C K
ASSISTANT PROFESSOR

2. Calculate the future value at the end of 4 years of the following series of payments at 9% rate
of interest
At the end of 1st year Amount deposited Rs 1000
At the end of 2nd year Amount deposited Rs 2000
At the end of 3rd year Amount deposited Rs 3000
At the end of 4th year Amount deposited Rs 4000

3. Discounting technique (present value technique)

Present value: The present value of an entity can be defined as the present worth of a
prospective amount of money or a stream of cash flows with a specified return rate.
Calculation of Present value
PV= FV

(1 + r) n
a. The present value of a single present cashflows
b. The present value of annuity/series of even cashflows
c. The present value of multiple (uneven) cashflows

a. The present value of a single present cashflows

- In case of Annual Compounding

PV= P1 or FV

(1 + r) n
Simple Problems:
1. Find out the present value of Rs 3000 received at the end of the year, if the discount rate is
9%PA
2. Calculate the present value of a sum of Rs 50000 received after 2 years, if the discount rate is
8% PA

- In case of multiple Compounding or Intra compounding

PV= P1 or FV

(1+ r)mn
m
Simple Problems:
1. Find out the present value of Rs 10000 receivable after 3 years at the rate of 12% interest.
Calculate semi-annually
2. Find out the present value of Rs 10000 receivable after 3 years at the rate of 10% interest.
Calculate semi-annually

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 KIRAN C K
ASSISTANT PROFESSOR

b. The present value of annuity or A series of equal or even future cashflows

PVA= P1 + P1 + P1 + P1
1 2 3
(1 + r) (1 + r) (1+ r ) (1+r )4

Where, PVA = Present Value of Annuity cash flow

P1 = Uniform series of payments
r = Discount rate or interest rate

Simple Problems:
1. Find out the present value of annuity receipt of Rs 4000 received for 4 years at the rate of 8%
discount rate
2. Find out the present value of a 5 years annuity of Rs 10000 discounted at 9 %

c. The present value of multiple (uneven) cashflows

PVEUCF = P1 + P2 + P3 + P4
1 2 3
(1 + r) (1 + r) (1+ r ) (1+r )4
Where, PVUECF = Present Value of uneven cash flow
P1, P2, P3 = uneven cashflows
r = Discount rate or interest rate

Simple Problems:
1. Calculate the present value of the following series of payments made at the end of each year for
a period of 5 years at 8% interest rate
Cash flow at the end of 1st year Rs 2000
Cash flow at the end of 2nd year Rs 4000
Cash flow at the end of 3rd year Rs 6000
Cash flow at the end of 4th year Rs 8000
Cash flow at the end of 5th year Rs 10000

2. Calculate the present value of the following series of payments made at the end of each year for
a period of fine years at 8% interest rate
Cash flow at the end of 1st year Rs 4000
Cash flow at the end of 2nd year Rs 5000
Cash flow at the end of 3rd year Rs 6000
Cash flow at the end of 4th year Rs 7000
Cash flow at the end of 5th year Rs 8000

Doubling Period: The doubling time is the period of time required for a quantity to double in size or
value. It is applied to population growth, inflation and resource extraction, consumption of goods,
compound interest, the volume of malignant tumours, and many other things which tend to grow over
time.
The doubling time formula is used in finance to calculate the length of time required to double an
investment or money in an interest-bearing account.
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