Page 44 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Unit 2: Time Value of Money

2.13 Summary Notes

Time value of money means that the value of money changes over a time.

It is the sum of money received today is worth more than if the same is received after some
time.
In compound value concept, the interest earned on the initial principal amount becomes a
part of the principal at the end of a compounding period.

Interest can be compounded even more than once a year.
An investor investing money in installments may wish to know the value of his savings
after ‘n’ years. This is called future value of series of cash flows.

In case of present value concept, we estimate the present worth adjusted for the time value
of money.

2.14 Keywords

Annuity: It is a stream of equal annual cash flows.

Cash Flow: It is the movement of cash into or out of a business, a project, or a financial product.
It is usually measured during a specified, finite period of time
Compound Interest: When interest is added to the principal, so that from that moment on, the
interest that has been added also itself earns interest.
Compound Value: The interest earned on the initial principal becomes a part of the principal at
the end of a compounding period.
Present Value: In case of present value concept, we estimate the present worth of a future
payment/instalment or series of payment adjusted for the time value of money.
Time Value of Money: Time value of money is that the value of money changes over a period of
time.

2.15 Review Questions

1. Mr. X deposited ` 1,00,000 in a savings bank account today, at 5 per cent simple interest for
a period of 5 years. What is his accumulated interest?
2. Mr. X invested ` 40,000 today, for a period of 5 years. Calculate the future value if his
required rate of returns is 10 per cent.
3. Suppose you deposit ` 1,00,000 with an investment company, which pays 10 per cent
interest with semiannual compounding. What is the total deposit amount at the end of
5 years?
4. Mr. A deposits at the end of each year ` 2000, ` 3000, ` 4000, ` 5000 and ` 6000 for the
consequent 5 years respectively. How he can know his series of deposits value at the end
of 5 years with 6 per cent rate of compound interest?

5. Assume you have been depositing each year for 5 years, the deposit amount of ` 100, ` 200,
` 300, ` 400 and ` 500 respectively. Calculate your deposits value if you get 7 per cent
compound interest and assume you have deposited in the beginning of each year.

6. If you invest ` 500 today, at a compound interest of 9 per cent, what will be its future value
after 60 years?

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