# BASICS OF TIME VALUE OF MONEY by simplycoool

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```									BASICS OF TIME VALUE OF MONEY

 COMPOUNDING –  This is a process of calculating future values of cash flows  DISCOUNTING – This is a process of calculating present values of cash flows  COMPOUND INTERESTThis is interest on principal plus interest on interest  ANNUITY This is a series of equal payment over a specified number of periods.

CALCULATIONS
LUMPSUM

PRESENT VALUE


`

ANNUITY



LUMPSUM

 FUTURE VALUE


`

ANNUITY

FUTURE VALUES
 Fv = PRINCIPAL + INTEREST  ILLUSTRATIONS---- LUMPSUM
 An amount of Rs 1000 with I=5% , T=3  If compounded Annually Fv = 1000(1+.05)3 =1157.60 or simply FV = P* CVFN I  If compounded semi annually, Fv = 1000(1.05/2)3*2  If compounded semi annually Fv = 1000(1.05/4)3*4


END OF YEAR

 Fv of Annuities

 ILLUS:- suppose Rs 1 deposited at the end of year for
next 4 year @6%. C I would be Period 0 1 2 Rs1 Rs1 fv = THUS 1.191 1.124 =4.375 3 Rs1 1.06 4 Rs1 1

BEGINNING OF YEAR

 FVoa = PMT [((1 + i)n - 1) / i]

 ILLUS:- suppose Rs 1 deposited at the beginning of
year for next 4 year @6%. C I would be

Period

0

1 Rs1

2 Rs1

3 Rs1

4 Rs1 1.06

fv =

1.262 1.191 1.124 =4.63

 i

PV = 5,000 i = .06 n=5 Year Begin Interest
End

1 0 0

2 300.00
5,000.00

3 618.00
5,000.00

4 955.08
5,000.00

5 21,873.08 1,312.38
5,000.00 28,185.46

5,000.00 10,300.00 15,918.00

Deposit 5,000.00

5,000.00 10,300.00 15,918.00 21,873.08

FVoa = 5,000 [ (1.3382255776 - 1) /.06 ] = 5,000 (5.637092) = 28,185.46

PV = 5,000 i = .06 n=5

FVoa = 28,185.46 (1.06) = 29,876.59 Year Begin Interest End 1 0 300.00 2 5,000.00 618.00 3 5,000.00 955.08 4 5,000.00 1,312.38 5 5,000.00 1,691.13

5,300.00 10,918.00 16,873.08 23,185.46

Deposit 5,000.00

5,300.00 10,918.00 16,873.08 23,185.46 29,876.59

PRESENT VALUES CALCULATIONS
 PRESENT VALUE OF SINGLE CASH FLOW: EX;- RS 50000 AFTER 15 YEARS @9%  PV=50000*PVF15,.09 =13,750  OR

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