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A Presentation On: Time Value of Money, Present and Future Value of Annuity

This document provides a summary of a presentation on the time value of money, present value, and future value of annuities. It discusses key concepts such as [1] money being a common medium of exchange, [2] the time value of money being important for financial decision making, and [3] individuals generally preferring to receive money now rather than later due to risk, consumption preferences, and investment opportunities. It also provides examples of calculating present and future values using standard formulas, and defines annuities as a stream of fixed payments over a specified period of time.

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Manoj Bhadu
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38 views15 pages

A Presentation On: Time Value of Money, Present and Future Value of Annuity

This document provides a summary of a presentation on the time value of money, present value, and future value of annuities. It discusses key concepts such as [1] money being a common medium of exchange, [2] the time value of money being important for financial decision making, and [3] individuals generally preferring to receive money now rather than later due to risk, consumption preferences, and investment opportunities. It also provides examples of calculating present and future values using standard formulas, and defines annuities as a stream of fixed payments over a specified period of time.

Uploaded by

Manoj Bhadu
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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A

PRESENTATION
on

TIME VALUE OF MONEY, PRESENT AND


FUTURE VALUE OF ANNUITY

Presented By :
Manoj Kumar(A-15)
Prasoon Saxena(A-26)
Shobhagata Ghoshal(A-37)
Money
Money is the medium of exchange.

In the previous days, before the invention of the money,


men used to exchange goods to fulfill their requirement.
After that people used to give gold to exchange. Now
after the invention of money, it becomes very easy to
exchange. Because money is the common platform.

Money is the most important and scare resource in a


firm. Without money nothing is possible to do or to
perform within the firm.
TIME VALUE OF MONEY
The time value of money is extremely vital in a
financial decision making. If the timing of cash flow is
not considered, The firm may make decisions that
may allow it to miss its objective of maximizing the
owners’ welfare.
Three reasons may be attributed to the individual’s
time preference for money :
RISK
PREFERNECE FOR CONSUMPTION
INVESTMENT OPURTUNITIES
PRESENT VALUE OF MONEY
Most individuals value the opportunities to receive
the money now higher then waiting for one or more
periods to receive the same amount.

As an individual is not certain about future cash


receipts, he or she prefers receiving cash now
because of the urgency of their present wants or
because of there risk of not being in a position to
enjoy future consumption.

In case of the firm as well as individuals, the


justification for time preference for money lies
simply in the availability of investment
opportunities.
Example:

An individual who is offered Rs. 100 now or Rs.


100 one year from now would prefer Rs. 100
now as he could earn on it at a interest of, Rs.
5 by putting in the savings account in a bank
for one year. Then his total cash in flow in one
year will be Rs. 105. So he will prefer Rs. 100
now then Rs. 100 after a year.
Future value of money
Future value measures the nominal future sum of money that
a given sum of money is "worth" at a specified time in the
future assuming a certain interest rate.
Let us assume that an investor requires 10% interest to make
him indifferent to cash flows one year apart. The question is:
How should he arrive at comparative value of cash flows that is
separated by two, or any no. of years.
The formula to find the solution:

[F=Future value of money, r=Rate of interest, n=No. of


years, P=Principal value or lump sum]
EXAMPLE
Q : A bank offers you, to deposit Rs. 100 and promises to pay
Rs.112 after one year. What rate of interest would you earn?

A: Here F=112 , P =100 , n=1.


we want to find out r
Then,
112=100 X (1+r)
or (112/100)= (1+r)
or r=112/100 -1
or r=.12 or 12% (Ans.)
Annuity

Annuity is a fixed payment or receipt each year for a specified


no. of years.
The equal installments loans from the house financing
companies or employers are common examples of annuities.
Suppose a constant sum of Re 1 is deposited in a savings
account at the end of each year for four years at 6% interest.
These implies that payment up to first year will grow for three
years and get interest for 3 years. In this manner payment at
the second year will roll for 2 years and at the end of third year
will roll for 1 year.
The payment at the end of fourth year will not yield any interest.
Using the concept of the compound value of lump sum, we can
compute the value of annuity.
PRESENT VALUE ANUITTY

The Present Value of an Annuity (PVa) is the value of a stream of


expected or promised future payments that have been discounted to a
single equivalent value today.
The PV calculation is useful in a variety of situations including:
valuing a series of retirement payments;
calculating the lump sum value of lottery winnings;
establishing the purchase price of property sold for installment payments;
determining the value of periodic payments under an insurance contract or
a structured settlement;

The formula to find out the present value of annuity is :

[P=Present value, A=Annuity factor, r=rate of interest, n=No. of years]


EXAMPLE
Q : A person receives an annuity of Rs 5000 for four years. If
the rate of interest is 10%, what will be present value of
annuity?

A : Given A=5000
r=10%=0.10
n=4
Then

= 5000X(10-6.830)
= 5000X3.170
P = 15,850
By using PVFA Table :
Period 1% 2% 3% 4% 5% 10% 15%
4 3.902 3.808 3.717 3.630 3.546 3.170 2.855

P=5000x(3.170)
P=15,850
FUTURE VALUE OF ANNUITY

Future value of an annuity (FVA) is the future value of a


stream of payments (annuity), assuming the payments are
invested at a given rate of interest.
It is used to find out the future value of a certain amount
deposited continuously for certain years. By using it you can
find out the amount of :
 Pension
 Equal monthly installment against loan etc.

Formula for future value of annuity(FVA) :

[F=future value of annuity, A=Annuity factor, r=rate of


interest, n=No. of years]
EXAMPLE
Q : What amount will accumulate  if we deposit Rs 5,000 at the end of each
year for the next 5 years?  Assume an interest of 6% compounded annually.

A: Given A=5000
r=6%=0.6
n=5 years
We know that

F=5000x[ (1.3382255776 - 1) /.06 ]


F= 5000x(5.637092)
F= 28,185.46
By using CVFA Table :

Year 1% 2% 3% 4% 5% 6% 7%

5 5.101 5.204 5.309 5.416 5.526 5.637 5.751

F=5000x(5.751)
F=28,185
THANK YOU..

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