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    Time Value of Money

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    anon_672065362
    The document discusses the time value of money and its relevance in financial decisions. It provides examples to illustrate key concepts. 1) Time value of money means that the value of money received today is greater than the same amount received in the future due to factors like risk, inflation, investment opportunities, and time preferences. 2) A person making 4 annual payments of Rs. 4,000 each at 10% interest will have a future value of Rs. 18,564 after 4 years. 3) A company offering Rs. 10,000 maturing to Rs. 12,625 after 2 years at 6% compounded half-yearly would offer a revised maturity value of Rs. 12,670 if interest

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    Time Value of Money

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    anon_672065362
    270 views2 pages
    The document discusses the time value of money and its relevance in financial decisions. It provides examples to illustrate key concepts. 1) Time value of money means that the value of money received today is greater than the same amount received in the future due to factors like risk, inflation, investment opportunities, and time preferences. 2) A person making 4 annual payments of Rs. 4,000 each at 10% interest will have a future value of Rs. 18,564 after 4 years. 3) A company offering Rs. 10,000 maturing to Rs. 12,625 after 2 years at 6% compounded half-yearly would offer a revised maturity value of Rs. 12,670 if interest

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    The document discusses the time value of money and its relevance in financial decisions. It provides examples to illustrate key concepts. 1) Time value of money means that the value of money received today is greater than the same amount received in the future due to factors like risk, inflation, investment opportunities, and time preferences. 2) A person making 4 annual payments of Rs. 4,000 each at 10% interest will have a future value of Rs. 18,564 after 4 years. 3) A company offering Rs. 10,000 maturing to Rs. 12,625 after 2 years at 6% compounded half-yearly would offer a revised maturity value of Rs. 12,670 if interest

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    270 views2 pages

    Time Value of Money

    Uploaded by

    anon_672065362
    The document discusses the time value of money and its relevance in financial decisions. It provides examples to illustrate key concepts. 1) Time value of money means that the value of money received today is greater than the same amount received in the future due to factors like risk, inflation, investment opportunities, and time preferences. 2) A person making 4 annual payments of Rs. 4,000 each at 10% interest will have a future value of Rs. 18,564 after 4 years. 3) A company offering Rs. 10,000 maturing to Rs. 12,625 after 2 years at 6% compounded half-yearly would offer a revised maturity value of Rs. 12,670 if interest

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    of 2

    CHAPTER 2

    TIME VALUE OF MONEY


    Question 1
    Explain the relevance of time value of money in financial decisions. (PCC-May 2008)(2 marks)
    Answer
    Time value of money means that worth of a rupee received today is different from the worth of
    a rupee to be received in future. The preference of money now as compared to future money
    is known as time preference for money.
    A rupee today is more valuable than rupee after a year due to several reasons:
    + Risk there is uncertainty about the receipt of money in future.
    + Preference for present consumption Most of the persons and companies in general,
    prefer current consumption over future consumption.
    + Inflation In an inflationary period a rupee today represents a greater real purchasing
    power than a rupee a year hence.
    + Investment opportunities Most of the persons and companies have a preference for
    present money because of availabilities of opportunities of investment for earning
    additional cash flow.
    Many financial problems involve cash flow accruing at different points of time for evaluating
    such cash flow an explicit consideration of time value of money is required.
    Question 2
    A person is required to pay four equal annual payments of Rs. 4,000 each in his Deposit
    account that pays 10 per cent interest per year. Find out the future value of annuity at the end
    of 4 years. (PCC-May 2007)(2 marks)
    Answer
    |
    |
    .
    |

    \
    |
    +
    =
    i
    1 i) (1
    A FVA
    n
    |
    |
    .
    |

    \
    |
    +
    .10
    1 .10) (1
    4,000
    n
    4,000 4.641 = Rs. 18,564
    Time Value of Money
    2.2
    Future Value of Annuity at the end of 4 years = Rs. 18,564
    Question 3
    A company offers a Fixed deposit scheme whereby Rs. 10,000 matures to Rs. 12,625 after 2
    years, on a half-yearly compounding basis. If the company wishes to amend the scheme by
    compounding interest every quarter, what will be the revised maturity value?
    (PCC-Nov. 2008)(3 marks)
    Answer
    Computation of Rate of Interest and Revised Maturity Value
    Principal = Rs. 10,000
    Amount = Rs. 12,625
    4
    i) (1
    12,625
    0,000 1
    +
    =
    Pn = A (PVFn, i)
    10,000 = 12,625 (PVF4, i)
    0.7921 = (PVF4, i)
    According to the Table on Present Value Factor (PVF4,i) of a lump sum of Re. 1, a PVF of
    0.7921 for half year at interest (i) = 6 percent. Therefore, the annual interest rate is 2
    0.06 = 12 percent.
    i = 6% for half year
    i = 12% for full year.
    Therefore, Rate of Interest = 12% per annum
    Revised Maturity Value =
    4 2
    4
    1
    100
    12
    1 0,000 1

    |
    .
    |

    \
    |
    +
    =
    8
    100
    3
    1 0,000 1 |
    .
    |

    \
    |
    +
    = 10,000 (1.03)
    8
    = 10,000 1.267 [Considering (CVF8,3) = 1.267]
    Revised Maturity Value = 12,670.

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