Answers by visitors named: Abacus

DESCRIPTION OE THE FOUR TIME VALUE OF MONEY CONCEPTS Present value is the value of a cash flow today. Usage when a single cash flow is to be discounted to today’s value. Formula PV = FV / ((1+i) ^n)) Where, PV = Present value FV = Future Value i= interest rate per compounding period n=period PVIF = Present Value Interest Factor = (1/ ((1+i) ^n)) Example Mr A would receive $1,100 from Mr B after 1 year. Find the present value of the cash flow if Mr A’s interest rate is 10% p.a. PV = 1100 / (1.1^1) = $1,000 Thus, the present value of cash flow to be received after 1 year is $1,000 today. Present value of annuity is the value of a series of equal cash flow received in equidistant period, today. Usage when a series of cash flow is to be discounted to today’s value. Formula PV = (a/i) (1-(1/ ((1+i) ^n))) Where, PV = Present value a = equal cash flow (annuity) i= interest rate per compounding period n=no. of annuities PVIFA = Present Value interest factor of annuity = (1/i) (1-(1/ ((1+i) ^n))) If cash flow occurs at the beginning of period then the above formula is to be multiplied by (1+i) Example Mr A would receive $1,000 from Mr B every year for 5 years. Find the present value of the cash flow if Mr A’s interest rate is 10% p.a. PV = (1000/.1)(1-(1/((1.1^5))) = $3,791 Thus, the present value of cash flow to be received every year for 5 years is $3,791 today. Future value is the value of a cash flow in future. Usage when value of a single cash flow is to be computed in future’s date. Formula FV = PV ((1+i) ^n)) Where, PV = Present value FV = Future Value i= interest rate per compounding period n=period FVIF = Future Value Interest Factor = ((1+i) ^n)) Example Mr A would receive $1,000 from Mr B today. Find the future value of the cash flow if Mr A’s interest rate is 10% p.a. FV = 1000 * (1.1^1) = $1,100 Thus, the future value of cash flow after 1 year is $1,100. Future value of annuity is the value of a series of equal cash flow received in equidistant period, on a future date. Usage when future value is to be computed for a series of cash flow. Formula FV = (a/i) (((1+i) ^n)-1) Where, FV = Future value a = equal cash flow (annuity) i= interest rate per compounding period n=no. of annuities FVIFA = Present Value interest factor of annuity = (1/i) (((1+i) ^n)-1))) If cash flow occurs at the beginning of period then the above formula is to be multiplied by (1+i) Example Mr A would receive $1,000 from Mr B every year for 5 years. Find the future value of the cash flow if Mr A’s interest rate is 10% p.a. FV = (1000/.1) ((1.1^5)-1)) = $6,105 Thus, the future value of cash flow to be received every year for 5 years is $6,105.