Time Value Of Money Presentation PDF

TIME VALUE OF MONEY  Public generally accepted that time is very precious, there for we have to manage time very efficiently. We placed ‘time’ on par with other valuable objects thus public generally accepted the proverb “time is money”. From the perspective of financial management, this p...

TIME VALUE OF MONEY  Public generally accepted that time is very precious, there for we have to manage time very efficiently. We placed ‘time’ on par with other valuable objects thus public generally accepted the proverb “time is money”. From the perspective of financial management, this proverb is a phrase that can be measured and proven quantitatively by using the financial mathematics. And from here, the concept of TVOM developed.  TIME VALUE OF MONEY DEFINITION ▪ Money that one has now is worth more than money one will receive in the future. 3  Time Line t0 t1 t2 ? First period Second period 0 1 2 3 i% CF0 CF1 CF2 CF3 It shows the timing of cash flows. Time 0 (t0) refers to present time (today) Time 1 (t1) is the end of the first period (year, month, etc.) or the beginning of the second period. Time 2, (t2 ) is the end of the second period or the beginning of the third period. What about time 3 (t3)? 8-4  Drawing Time Lines : Example Future value RM100 lump sum due in 2 years, interest 5 % 0 1 2 5% 100 Future value 3 years of RM100 ordinary annuity, i=5% 0 1 2 3 5% 100 100 100 8-5  Drawing Time Lines Uneven cash flow stream, with i=5% 0 1 2 3 5% -50 100 75 50 8-6  FINANCIAL TABLE / INTEREST FACTOR TABLE  Time Value of Money ▪ Future Value, FV ▪ Present Value, PV ▪ Future Value Annuities, FVA ▪ Present Value Annuities, PVA 8-8 Time Value Terms ▪ FV = future value at end of “n” periods ▪ PV = present value or beginning amount ▪ i = interest rate ▪ n = number of compounding periods ▪ PMT = use in annuity (series of equal payments or receipts) 9  COMPOUNDING AND DISCOUNTING TECHNIQUES FUTURE VALUE, FV ▪ measure cash flows at the end of a project’s life. ▪ it is cash you will receive at a given future date. ▪ The future value technique uses compounding to find the future value of each cash flow at the end of an investment’s life and then sums these values to find the investment’s future value. 5-11 FORMULA OF FUTURE VALUE : 𝑭𝑽𝒏 = 𝑷𝑽(𝟏 + 𝒊)𝒏 FVn = PV x (FVIFi,n) Example: If Fred Moreno places RM100 in a savings account paying 4% interest compounded annually, how much will he have in the account at the end of two year? 𝑭𝑽𝒏 = 𝑷𝑽(𝟏 + 𝒊)𝒏 𝐹𝑉2 = 100 1 + 0.04 2 = 100(1.04)2 = 100(1.0816) = 108.16# Finding FV using Table : 𝐹𝑉𝑛 = 𝑃𝑉 (𝐹𝑉𝐼𝐹 𝑖%,𝑛 ) 𝐹𝑉2 = 100 (𝐹𝑉𝐼𝐹 4%,2 ) = 100 (1.0816) = 108.16 PRESENT VALUE ▪ Present value is the current dollar value of a future amount of money. ▪ It is based on the idea that a dollar today is worth more than a dollar tomorrow. ▪ It is the amount today that must be invested at a given rate to reach a future amount. 15 FORMULA OF PRESENT VALUE 𝑷𝑽𝒏 = 𝑭𝑽𝒏 / (𝟏 + 𝒊)𝒏 PV = FV x (PVIFi,n) 16 Example : Paul shorter has an opportunity to receive RM300 three years from now. If he earns 6% on his investment, what is the most he should pay now for this opportunity? 𝑷𝑽𝒏 = 𝑭𝑽𝒏 / (𝟏 + 𝒊)𝒏 𝑃𝑉3 = 300 / (1 + 0.06)3 = 300 / 1.063 = 300 / 1.1910 = 251.88# Finding PV using table: 𝑃𝑉𝑛 = FV (𝑃𝑉𝐼𝐹𝑖%,𝑛 ) 𝑃𝑉3 = 300 (𝑃𝑉𝐼𝐹6%,3 ) = 300 (0.8396) = 251.88 # ANNUITY Annuity is a series of payment or receiving of the same amount at the same intervals throughout the period of valuation. Annuity that occurs at the end of each period is known as ordinary annuity. Annuity that occurs at the beginning of each period is known as due annuity. EXAMPLE FUTURE VALUE ANNUITY 𝐅𝐕𝐀𝐧 = PMT x (FVIFA i%,n) Jeff wishes to determine how much money he will have at the end of 10 years if he invest that get payment RM2500 per year. He earns 7% annually. FVA = PRESENT VALUE ANNUITY 𝐏𝐕𝐀𝐧 = PMT x (PVIFAi%, n) Braden Company, a small producer of plastic toys, wants to determine the most it should pay to purchase a particular annuity. The annuity consists of cash flows of $700 at the end of each year for 5 years. The required return is 1%. PVA = Thank You