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Richa Kumar
Richa Kumar
Richa Kumar
Richa Kumar
Richa Kumar
Abbreviations
PV - Present value
FV - Future value
Pmt - Per period payment amount/ Installment
N - Either the total number of cash flows or
the number of a specific period
i - The interest rate per period
Richa Kumar
Timelines
A timeline is a graphical device used to clarify the
timing of the cash flows for an investment
Each tick represents one time period
PV
0
Today
FV
1
3
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9
-10,000
0
FV1=10,000(1+0.10)=11,000
10
?
1
FV2=10000(1+0.10)(1+0.10) = 12100
or
FV2=10000(1+0.10)2 = 12100
Interest= 12100-10000=2100
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Interest= 13310-10000=3310
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Compound Interest
The reason for the increase is that each year you are
earning interest on the interest that was earned in
previous years in addition to the interest on the
original principle amount
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Compound Interest
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Compound Interest
P = Principal
i = Interest
rate
N = Number of
interest
periods
Example:
P = 10,000
i = 10%
N = 3 years
End of Beginning
Year
Balance
Interest
earned
Ending
Balance
10,000
10,000
$1000
$11,000
11,000
$1100
12100
12,100
1210
13,310
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13,310
2
3
10,000
FV=10000(1+0.10
)3
FV=13,310
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3833.76
3500
5%
3000
10%
15%
Future Value
2500
20%
2000
1636.65
1500
1000
672.75
500
265.33
0
0
10
11
12
13
14
15
16
17
18
19
20
Years
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Rs.54,562,898,811,973,500
Thats about 54,563 Trillion Rupees!
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FVN = PV(1+i)N
Computation by this formula can become time
consuming if the number of years become larger, say
15 years.
In such cases, compound value table can be used. The
table gives the compounded value of Re 1 after n
years for a wide range of i and n
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P=10000
N=3
i= 10% (0.10)
Compounding factor as per table = 1.331
Thus, FV=1.331*10,000= Rs. 13310
Interest = 13,310-10,000=Rs. 3,310
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1%
1.01
1.02
1.03
1.041
1.051
1.062
1.072
1.083
1.094
1.105
1.116
1.127
1.138
1.149
1.161
1.173
1.184
1.196
1.208
1.22
2%
1.02
1.04
1.061
1.082
1.104
1.126
1.149
1.172
1.195
1.219
1.243
1.268
1.294
1.319
1.346
1.373
1.4
1.428
1.457
1.486
3%
1.03
1.061
1.093
1.126
1.159
1.194
1.23
1.267
1.305
1.344
1.384
1.426
1.469
1.513
1.558
1.605
1.653
1.702
1.754
1.806
4%
1.04
1.082
1.125
1.17
1.217
1.265
1.316
1.369
1.423
1.48
1.539
1.601
1.665
1.732
1.801
1.873
1.948
2.026
2.107
2.191
5%
1.05
1.103
1.158
1.216
1.276
1.34
1.407
1.477
1.551
1.629
1.71
1.796
1.886
1.98
2.079
2.183
2.292
2.407
2.527
2.653
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6%
1.06
1.124
1.191
1.262
1.338
1.419
1.504
1.594
1.689
1.791
1.898
2.012
2.133
2.261
2.397
2.54
2.693
2.854
3.026
3.207
7%
1.07
1.145
1.225
1.311
1.403
1.501
1.606
1.718
1.838
1.967
2.105
2.252
2.41
2.579
2.759
2.952
3.159
3.38
3.617
3.87
8%
1.08
1.166
1.26
1.36
1.469
1.587
1.714
1.851
1.999
2.159
2.332
2.518
2.72
2.937
3.172
3.426
3.7
3.996
4.316
4.661
9%
1.09
1.188
1.295
1.412
1.539
1.677
1.828
1.993
2.172
2.367
2.58
2.813
3.066
3.342
3.642
3.97
4.328
4.717
5.142
5.604
10%
1.1
1.21
1.331
1.464
1.611
1.772
1.949
2.144
2.358
2.594
2.853
3.138
3.452
3.797
4.177
4.595
5.054
5.56
6.116
6.727
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P=1000
N=3 years
i= 10% p.a.
For finding the FV using semi-annual compounding,
we convert the period (N) into number of half years
( 3X2=6) and convert rate of interest from annual
(p.a) to half year ( 10%/2=5%)
FV= 1000(1+0.05)6
FV=1000(1.34)=1340
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End
of
Year
Amount
Deposit
ed (2)
No of
Compound
years
interest
compound factor (4)
ed
F. V
(2)x(4)
500
1.210
605
1000
1.100
1100
2000
1.000
2000
Total
3705
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Compounding Annuities
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End
of
Year
Amount
Deposit
ed (2)
1000
No of
Compound
years
interest
compound factor (4)
ed
F. V
(2)x(4)
1.210
1210
1000
1.100
1100
1000
1.000
1000
Total
3310
28
29
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PV6=(100000)/(1.10)6 , Or
100000 X (1/(1.10)6 )= 100000 X 0.56447=56,447)..See
PV Table)
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Present Value of Re 1
37
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1000
2000
3000
4000
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Cash
Flows
(2)
1000
2000
3000
4000
Tota 10,00
Present
value
Factor
(3)
PV Table
Value
Present
Value
(2 )X (3)
1/
(1.10)1
1/
(1.10)2
1/
(1.10)3
1/
(1.10)4
0.909
909
0.826
1652
0.751
2253
0.683
2732
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Annuities
100
100
100
100
100
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62.0
68.3
9
75.1
0
82.6
3
90.9
4
1
379.0
8
100
100
100
100
100
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500
500
500
500
1/
(1.10)1
1/
(1.10)2
1/
(1.10)3
1/
(1.10)4
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Present
Value
(2 )X (3)
0.909
454.50
0.826
413.00
0.751
375.50
0.683
341.50
45
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For example we can use this equation to find the present value of
Rs.100 of 5 year annuity at 10% discount rate as follows: Pmt
=100,i=10%, N= 5
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PV of Perpetual Annuity
Some investments are such that the cash flow are unending (i.e. perpetual) and we get the cash flow for
infinite number of periods. Unlike the ordinary annuity
where the cash flow are received for a fixed number of
years, in perpetual annuity, cash flows are received
year after year, forever.
For example, a donor may like to institute a
scholarship for students of an Institute and prefer an
annuity that is perpetual so that scholarship amount
could be given every year, for indefinite period of time.
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