The Time Value of Money

Which would you rather have – Rs. 10,000/-

Today or Rs. 10,000/- in 5 years?

Obviously, Rs. 10,000/- today.

today

Money received sooner rather than later

allows one to use the funds for investment
or consumption purposes. This concept is
referred to as the TIME VALUE OF
MONEY!!
MONEY
Compound Interest (Single
Period)
When interest is paid on not only the principal amount
invested, but also on any previous interest earned,
this is called compound interest.

FV = Principal + (Principal x Interest)

= 2000 + (2000 x .06)
= 2000 (1 + i)
= PV (1 + i)

Note: PV refers to Present Value or Principal

 Future Value
(Graphic)
If you invested Rs. 10,000 today in an
account that pays 6%
6 interest, with interest
compounded annually, how much will be in
the account at the end of two years if there
are
0 no withdrawals?1 2
6%
Rs.10,000
FV
 Future Value
(Formula)
FV1 = PV (1+i)n = Rs. 10,000
(1.06)2 = Rs.
11,236/-
FV = future value, a value at some future point in time
PV = present value, a value today which is usually
designated as time 0
i = rate of interest per compounding period
n = number of compounding periods
 Future Value
(Casio Financial Calculator)

Go to CMPD Menu
Set : END

N 2

I % Yr 6
PV -10,000

FV 11,236
 Future Value Example
Ram wants to know how large his Rs. 50,000
deposit will become at an annual compound
interest rate of 8% at the end of 5 years.
years

0 1 2 3 4 5
8%
Rs.50,000/-
FV5
 Future Value Solution
Calculation based on general formula:
FVn = PV (1+i)n
FV5 = Rs. 50,000 (1+ 0.08)5
= Rs. 73,466.40
Calculator Key Strokes :
PV = - 50,000/-
I =8%
N = 5 yrs
FV = 73,466.40
Double Your Money!!!

Quick! How long does it take to double

Rs.5,000 at a compound rate of 12% per year
(approx.)?

We will use the “Rule-of-72”.

The “Rule-of-72”

Quick! How long does it take to double

Rs.5,000 at a compound rate of 12% per year
(approx.)?

Approx. Years to Double = 72 / i%

72 / 12% = 6 Years
[Actual Time is 6.12 Years]
 Future Value
Q1. Mr. X invests Rs.25000 in a deposit
paying interest at 10% per annum
compounding yearly. What will he get on
maturity after 10 years?
Set=begin
N=10
i=10
Pv=-25000
Fv=solve=64843.5615
Future Value

Q.2.Naman deposits Rs.100000/- in a bank that

pays 8% interest compounded annually. How much
the deposit will grow after 5 years and 8 years
respectively?
• Answer:
• For 5 years FV =
Rs.146932.8077(n=5,i=8,pv=-100000,
fv=solve
• For 8 years FV = Rs.18509.30
Q.3 Nisha deposit Rs.80000/- in a bank at 10%
interest compounding semi-annually. How much
deposit will grow after 5 years?
• Answer:
• Set=begin
• N=5
• i=10
• Pv=-80000
• c/y=2
• Fv=solve=130311.5701
Q.4 Mr. X takes a loan of Rs.145000/- from
Mr. Y. Y is charging an interest rate of 8.5%
per annum compounded quarterly from X.
How much interest Y gets if X pay back loan
in 5 years?
• Sol. Set = begin
• N=5
• i=8.5
• Pv=145000
• c/y=4
• Fv=solve=-220805.2489
• Interest = 220805-145000=75805
Q.5 Nisha invest in a fixed deposit of
Rs.180000/- @ 12% p.a. compounded monthly.
What will be the amount she will get after
2.8years?
• Sol.
• Set=begin
• N=2.8
• i=12
• Pv=-180000
• c/y=12
• Fv=solve=251461.015
Q.6 Deepti Gupta Invest Rs.20000 at 12% p.a.
compounded half yearly. Calculate the amount she
has after 2 years 5 months?
• Sol.
• Set=begin
• N=2+5/12
• i=12
• Pv=-20000
• c/y=2
• Fv=solve=20985.37
Q.7 Shikha won the lottery worth Rs.960000/-.
She invests this amount in a term deposit at
9.5%. Compounding is done annually for the 1st
year and quarterly for the 2rd year. Calculate the
amount she has after 2 years?
• Sol. Step1 step 2
• Set=begin set=begin
• N=1 n=1
• i=9.5 i=9.5
• Pv=-960000 pv=-1051200
• Fv=1051200 c/y=4
• fv=1154678.319
Q.8 Meenakshi invest Rs.200000/- for 4 years in a term
deposit of a bank at 6% p.a. compounded semi-annually.
After 4 years she deposit half the maturity proceeds in post
office at a rate of 7% per annum compounded quarterly for
6 years and from the rest of the maturity proceeds she buys
the Handy Cam for her daughter. Calculate the money she
has after 10 years?
• Sol.
• Step 1 Step 2
• Set=begin set= begin
• N=4 n=6
• i=6 i=7
• Pv=-200000 pv=-253354.0163/2
• c/y=2 c/y=4
• Fv=solve=253354.0163
fv=solve=384196.8704
Q.9 Suman has Rs.260000/- if she invest
Rs.145000 in a term deposit of bank earning 8%
p.a. compounding quarterly and balance in a post
office saving scheme earning 8.5% p.a.
compounded semi annually. Calculate the amount
she has after 2 years 9 months?

=
• Sol. Step 1 Step 2
• Set = begin set=begin
• N=2+9/12 n=2+9/12
• i=8 i=8.5
• Pv=-145000 pv=-(260000-145000)
• c/y=4 c/y=2
• Fv=solve fv=solve=144582.6533
• =180289.2747
• Total amount = 180289.2747+144582.6533
= 324871.928
Q10. Mr. Ambani deposits Rs.5 lakh in a
account that gives interest at 13% p.a.
compounded monthly for 1st year, 12%
p.a. for 2nd year and after that 10% p.a.
compounded quarterly forever. Find the
maturity amount after 10 years?
 Present Value

• Since FV = PV(1 + i)n.

PV = FV / (1+i)n.

• Discounting is the process of translating a

future value or a set of future cash flows
into a present value.
 Present Value
(Graphic)
Assume that you need to have exactly
Rs.40,000 saved 10 years from now. How
much must you deposit today in an account that
pays 6% interest, compounded annually, so that
you reach your goal of Rs. 40,000?
0 5 10
6%
Rs.40,000
PV0
 Present Value
(Formula)
PV0 = FV / (1+i)10 = Rs.40,000 / (1.06)10
= Rs.22,335.80

0 5 10
6%
Rs.40,000
PV0
 Present Value
(Casio Financial Calculator)

Go to CMPD Menu

N 10
I 6
FV 40,000
PV - 22,335.80
 Present Value Example
Ram needs to know how large of a deposit to
make today so that the money will grow to
Rs.50,000 in 5 years. Assume today’s deposit
will grow at a compound rate of 4% annually.

0 1 2 3 4 5
4%
Rs.50,000
PV0
 Present Value Solution
Calculation based on general
formula: PV0 = FVn / (1+i)n
PV0 =
Rs.50,000/(1.04)5 =
Rs.41,096.35
 Present Value
(Casio Calculator)
Go to CMPD Menu

N 5
I 4
FV 50,000
PV 41,096.35
Present Value
Q.1 What amount need to be invested now to have
Rs.21435.88 in 8 years given an annual rate of
interest of 10% p.a. compounding yearly ?

Answer: Rs.10000
Q.2 What amount needs to be invested today to
have Rs.800000 after 12 years if the investment
earns 10% rate of return compounding monthly?

Answer: Rs.242156.4784
Q.3 What amount must be invested @ 8%p.a. for
4 years compounded semi-annually to grow to
Rs.100000/-?

Answer: Rs.73069.02
Q4. What would you prefer Rs.5000 today or
Rs. 7000 after 6 years. Assuming that Rs. 5000
can be invested for 6 years at 9% p.a.
compounding annually.

Answer: Value of Rs. 5000 after 6 years is Rs.

8385.50 which is more than Rs. 7000 receivable
after 6 years. So better take Rs. 5000 today.
Q5. Which option is better:
b. 1 lac today
c. 50000 now and 60000 thousand after 2
years
d. 30000 now, 35000 after 2 years and
45000 after 4 years
If discount rate is 14% p.a. compounded
quarterly?
Q.6. What amount must be invested @ 8%p.a. for 4
years compounded quarterly to grow to Rs.10000/-?

Answer: Rs.7284.45
Q.6 Nitin wants to accumulate Rs.150000 in 3years
for one month trip to USA assuming he can get 8%
annual return on her investments compounded
quarterly. How much he invests today in order to
achieve her goals.

Answer: Rs.118273.97
Q.7 Manish wants to accumulate Rs.150000 in 3
years for one month trip to USA assuming he can
get 8% annual return on his investments
compounded monthly. How much he invests today
in order to achieve his goal.

Answer: Rs.118088.19
Q.8 How much you invest now to have Rs.100000
after 2 years if the interest for the first year is
5%p.a and for the second year 6.5%p.a
compounding annually.

Answer: Rs.89425.43
Q.9 How much you invest now to have Rs.100000
after 2 years if the interest for the first year is 5%p.a
compounding annually and for the second year
6.5%p.a compounded semi annually?

Answer: Rs.89336.83
Q.10 What amount need to be invested now to get
Rs.30474/- after 2 years if you get Rs.18662 from a
term deposit of bank earning 8% p.a.
compounding annually and balance in a post office
saving scheme earning 8.5% p.a. compounded semi
annually.
Answer: Rs.26000 (Approx)
Step 1:- N=2 Step2:- N=2
I=8 I= 8.5
FV= 18662 FV =(30474-18662) = 11812
PV= solve=15999.65 c/y=2
PV=solve=10000.44