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# Time value money

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Course ID: 376475

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₹ 500

Chartered accountant qualified in 2012, 7.5 yrs experience in Big 4(EY) conducted training for 3 Yrs

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Time value money - This chapter is first chapter when start studying financial management.

Time value of money

• Suppose you are given a choice to receive \$5000, today or after a year what will you prefer?
Obviously, you will opt to receive it today\$ 5000 because you can earn the interest in the year

Suppose interest rate is @10% Per annum

Now (0 Year (Today)) 1 Year
\$ 5000 (PV) 5000+ 5000*0.10
=5,500 (FV)
Time value of money

Difference b/w present value (PV) and Future Value is time value money (FV). i.e (Interest rate)
Time value money= 5500-5000= 500
=500

Types of Interest
1) Simple Interest (Legal interest)
2) Compound Interest (XXXXX)
Mostly which we use in day-to-day life?
Simple Interest rate
Principal=\$5000
1 Year
10%
For Interest
=5000*.10*1
=500
2nd Year
= 5000*.10*1
=500
2. Compound Interest, compounding is annually
Principal =5000
1 Year = 500
2nd year= (5000+500) *.10*1
=550
3rd year=
Principal=5000+(Ist year interest)500+ (2nd yrs Interest) 550
Principal=6050
Interest=6050*10*1
=605
Suppose Every year bank is paying the interest then how we will calculate the interest rate
Interest rate 10%, Principal is \$5000
Principal =5000
1 Year Interest = 500 (which paid by bank)
2nd year= (5000) *.10*1
=500

1.Simple Interest
Every period interest calculated on initial Principal amount is known as Simple interest.

Now 1 Yr 2nd Yr
\$ 5,000 =\$5,000*0.01*1 =\$5,000*0.01
=500 =500
Simple interest amount every period will be the same.
Mostly use in legal cost

Compound Interest
Interest calculated on previous period interest plus(+) Principal is known as compound interest.

Now 1 Yr 2nd Yr
\$ 5,000 =\$5,000*0.01 =\$5,500*0.01 =(5000+500)
=500 =550
=(5000+500+550)*0.10
Compound interest every period will be different.
What will happen if bank will pay 500 at end of year end?
=5000*0.01

Compounding in yearly basis
- Monthly (10%/12)
- Quarterly (.10/4)
- Daily (0.10/365(360))
- Semi-annual (0.10*6/12)

Not decided yet.

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### Shikha Gupta

Chartered accountant qualified in 2012, 7.5 yrs experience in Big 4(EY) conducted training for 3 Yrs

1 Reviews

Students Interested 0 (Seats Left 0)

₹ 500

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### Shikha Gupta

Chartered accountant qualified in 2012, 7.5 yrs experience in Big 4(EY) conducted training for 3 Yrs

1 Reviews

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