Page 66 - DMGT302_FUNDAMENTALS_OF_PROJECT_MANAGEMENT

Unit 4: Project Budgeting

Notes
!
Caution The liabilities side of the balance sheet shows the sources of finance employed by
the business. Share capital consists of paid-up equity and preference capital.

4.4 Time Value of Money

Money has time value. A rupee today is more valuable than a rupee a year hence. Why? There
could be several reasons:
1. Individuals, in general, prefer current consumption to future consumption.

2. Capital can be employed productively to generate positive returns. An investment of one
rupee today would grow to (1 + r) a year hence (r is the rate of return earned on the
investment).
3. In an inflationary period a rupee today represents a greater real purchasing power than a
rupee a year hence.

Future Value of Single Amount

The process of investing money as well as reinvesting the interest earned thereon is called
compounding. The future value or compounded value of an investment after n years when the
interest rate is r percent is:

FV = PV(l + r) n
n
In this equation (1 + r) is called the future value interest factor or simply the future value factor.
n
To solve future value problems you have to find the future value factors. You can do it in
different ways.

Example: Suppose you invest ` 5, 000 for three years in a savings account that pays 10
percent interest per year. If you let your interest income be reinvested, your investment will
grow as follows:

First year Principal at the beginning 5,000
Interest for the year 500
(` 5,000 × 0.10)

Principal at the end 5,500
Second year Principal at the beginning 5,500
Interest for the year 550

(` 5,500 × 0.10)
Principal at the end 6,050
Third year Principal at the beginning 6,050

Interest for the year 605
(` 6,050 × 0.10)
Principal at the end 6,655

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