Faculty Guide:-

Prof. Krutika Mistry

Submitted By :-

Disha Patel 27Kalpan Patel 28

Section : - C

SUB. :- Financial Management

TOPIC : - Time value of Money (compounding)

PARUL INSTITUTE OF MANAGEMENT & RESEARCH

INTRODUCTION:

Why we need of time value of money? Why is time such an important element in

your decision?..

Because…. Time allows you the

opportunity to postone consumption and earn interest…..

It compare the money between two period….

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TYPES OF INTEREST:

SIMPLE INTEREST:

Interest earn and paid on only original amount or principal lent and borrowed.

o COMPOUND INTEREST:

Interest earn and paid on any previous interest earned as well as on the principal borrowed.

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FUTURE VALUE :

To calculate time value of future amount there are two way..

future value of lum sum amount.

future value of annuity.

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FUTURE VALUE OF LUM SUM AMOUNT:

When an amount is deposited for a time period at a given rate of interest..

the amount that is accrued at the end is called the future value of the original investment.

So if rs. P is invested for N period at R% per periods.

FV= P(1+r)n

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FVIF:

(1+r)n is the amount to which an investment of rs. 1 will grow at the end of N periods.

It is called FVIF- future value interest factor.

It is a function of r & N. It is given in the form of table

for integer value of r & N. If the FVIF is known, the future

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CONTINUE……

value of any principal can be found by multiplying the principal by the factor.

o the process of finding the future value is called COMPOUNDING….

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EXAMPLE:

Suhasini has deposited rs. 10000 for 5 years at 10%. Compounded annually..

P= Rs. 10000 N= 5years r= 10% FVIF=P(1+r)n = 10000(1+0.10)5 =10000 * 1.6105 =Rs. 16105

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FUTURE VALUE ANNUITY:

What is annuity?. It is a series of identical

payments made at equally spaced interval of time.

FVA= A/r[(1+R)N -1](1+r) Hance FVIFA(r,n)= A(r,n)*(1+r) It is the future value of annuity that

pays Rs. 1 per period. For any annuity that pays Rs A per

period, the future value can be found by multiplying A by the factor.

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FUTURE VALUE ANNUITY CONT……

The future value of an annuity due that makes N payments, is greater than that of a corresponding annuity, if the future value is computed at the end of N periods.

Why?.... because each cash flow has to

be computed for one period more.

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CONTI……

An annuity that pays forever is called a perpetuity.

The future value of a perpetuity is obviously infinite.

But a perpetuity has a finite present value.

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EXAMPLE:

If David takes an LIC policy with a premium of Rs. 12000 per year for 25 years, what is the cash value at the end of 25 years?.

F.V. = 12000*[ (1.10)25- 1 /0.10] *1.10

= Rs. 1298181.19

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THANK YOU……….

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