Time Value of Money
A. Would be the “INFLATION RATE”.
E.g.:- Rs.1,000.00 for 25 Ltr. Prtrol now; but Rs.1,050.00 a year later.
Hence; TVM is Inflation Rate, 5% here.
B. If 1,000.00 invest in “RISK FREE” Investment; can earn 1,080.00 a year later.
Extra 3% is “REAL RATE OF RETURN”. And 8% is TVM Now.
C. If 1,000.00 invest in “RISKY” Investment; can earn >1,080.00 a year later.
Extra is “RISK PREMIUM”
Now; TVM is Inflation Rate +
Real Rate of Return +
Risk Premium.
"SINGLE CASH FLOW”A. FV= PV * (1+TVM) ^n OR FV= PV* (1+r) ^ n
E.g.:- 300.00 Rs Invest for 2 years @ 12% pa. =300*(1+0.12) ^ 2 = 376.20
B. PV = FV/(1+TVM) ^ n OR PV= FV/(1+r) ^ n
Alternately;
A. FV = PV * FVF
B. PV = FV * 1/FVF
C. PV = FV * PVF
