Time Value of Money
Value of money changes over time.
Today 1 year later
Choose: ₹ 1,000 > ₹ 1,000
~ 1060 > ₹ 1,000
Today Year Int Int Amount Cl/ bal
1000 1 6% 60 1060 1060
PV n r FV FV
Opportunity cost
Interest rate
Rate
Compounding rate
Discounting rate
Time Value of Money
1 Future value FV
2 Present value PV
3 Payment PMT
4 Interest rate RATE
5 No. of Periods NPER
Q1: If I invest Rs.20000 today @8%p.a., how much will I get after two years?
FV
1 Future value FV ₹ 23,328.00
2 Present value PV ₹ -20,000.00 -PV
3 Payment PMT ₹ 0.00 FV
4 Interest rate RATE 8.00%
5 No. of Periods NPER 2
Q2: In order to pursue MBA in a year's time, required fee is $50,000. How much do I need to set aside today if interest rate i
PV
1 Future value FV $ 50,000.00
2 Present value PV $ -45,454.55 Year 0
3 Payment PMT $ -
4 Interest rate RATE 10%
5 No. of Periods NPER 1
DIFFERENT FREQUENCY OF COMPOUNDING
Q3: A crypto-exchange cum vault offers to pay you 6 percent compounded monthly. You decide to
invest 1 million bitcoins for one year.
What is the future value of your investment if interest payments are reinvested at 6 percent?
FV FV
1 Future value FV ₿ 1,061,677.8 ₿ 1,060,000.0 ₿ 1,677.81
2 Present value PV ₿ -1,000,000.0 ₿ -1,000,000.0
3 Payment PMT ₿ - ₿ -
4 Interest rate RATE 0.50% 6.00%
5 No. of Periods NPER 12 1
₿ 61,677.81 ₿ 60,000.00
6.17% 6.00%
ANNUITY
Q4: Annuity of $200 at the end of each year for 3 years at 10%. Find its Future Value and
Present Value.
FV PV Year 0 Year 1
1 Future value FV $ -662.00 $ - $ 497.37 200
2 Present value PV $ - $ -497.37
3 Payment PMT $ 200.00 $ 200.00
4 Interest rate RATE 10% 10% ₹ -662.00
5 No. of Periods NPER 3 3
Annuity regular equal cashflows at regular intervals
equal
equal frequency
MORTGAGE
Q5: Mr. CJ is planning to purchase a $120,000 house by making a down payment of $20,000.
and borrowing the remainder with a 30-year fixed-rate mortgage with monthly payments.
The first payment is due at the end of 1 year. Current mortgage interest rates are quoted at 8 percent with monthly compoun
What will your monthly mortgage payments be?
PMT
1 Future value FV
2 Present value PV $ 100,000.00
3 Payment PMT $ -733.76
4 Interest rate RATE 0.67%
5 No. of Periods NPER 360
Q6: Value of investment at the beginning of 2018=$7.35 mn, value at the end of 2023=$10.25 mn, find the rate of return.
Rate
1 Future value FV $ 10.25 2018
2 Present value PV $ 7.35 2019
3 Payment PMT $ - 2020
4 Interest rate RATE 5.699% 2021
5 No. of Periods NPER 6 2022
Q7: How many $100 end-of-year payments are required to accumulate $920 if the 2023
discount rate is 9%?
Period
1 Future value FV $ 920.00
2 Present value PV
3 Payment PMT $ -100.00
4 Interest rate RATE 9%
5 No. of Periods NPER 7.00
=B11*(1+D11)^C11
=PV*(1+r)^n
aside today if interest rate is 10%?
Year 1
50000
Year 2 Year 3
200 200
662
cent with monthly compounding.
n, find the rate of return.
Compound Annual Growth Rate (CAGR)
Revenue 100 170 210 250 340
Growth% 70% 24% 19% 36%
Arithmetic Mean 37.14% FV 353.76
CAGR =(Ending value / Beginning value) ^ (1/n) - 1
CAGR 35.79%
CAGR 35.79% FV 340.00
CAGR 35.79%
Weighted Avg. Cost of Capital (WACC)
From Investor's perspective:
Investment Options Weights% Returns% Product
Savings Account 40% 4% 1.60%
Fixed Deposit 25% 7% 1.75%
Bonds 10% 10% 1.00%
Equity 25% 15% 3.75%
Opportunity Cost for Investor 100.00% 8.10% 8.10%
Return= Cost
From Company's perspective:
Source of Funding Weights% Cost% Product
Equity 50% 15% 7.50%
After tax cost of Debt 50% 10% 5.00%
Company's Cost of Capital 100.00% 12.50% 12.50%
NPV & IRR
Case I: Case II:
Year Cash Flow DCF
0 -$80,000
1 $5,000 4,545
2 $14,000 11,570
3 $12,000 9,016
4 $15,000 10,245
5 $16,000 9,935
6 $18,000 10,161
7 $20,000 10,263
8 $40,000 18,660
84,395
Discount rate 10.00%
PV of Cash Inflows 84,395
NPV 4,395 4,395
IRR 11.17%
Check 0.00
Decision Accept
Rules for decision-making:
1 Intrinsic Value > Asking Price
2 NPV > 0
3 IRR > WACC
Cum.
Year Cash Flow Days Days DCF
12/31/2023 -$80,000
10/26/2024 $5,000 300 300 4,623
10/11/2025 $14,000 350 650 11,814
8/7/2026 $12,000 300 950 9,364
8/12/2027 $15,000 370 1320 10,627
8/16/2028 $16,000 370 1690 10,291
8/1/2029 $18,000 350 2040 10,566
6/27/2030 $20,000 330 2370 10,771
7/2/2031 $40,000 370 2740 19,558
87,615
Discount rate 10.00% NPV assumes cash flows occur at end of t
with equal time intervals
PV of Cash Inflows 87,615 Initial Investment is to be considered sep
XNPV considers cash flows at the given d
Initial Investment NEED NOT be consid
XNPV 7,615 7,615 separately
NPV@IRR
IRR 11.17% 3,380 Incorrect
XIRR 12.17% 0.00
Decision Accept
es cash flows occur at end of the year
with equal time intervals
stment is to be considered separately
siders cash flows at the given dates.
vestment NEED NOT be considered
separately
Evaluating Projects
Mr. Tata has come across some investment opportunities:
Buy Air India: Considering purchasing an airline company Air India banking on its brand value.
Buy JLR: Consider buying Jaguar-LandRover and utilise its luxury tech for existing brand Tata Motors.
Inputs & Assumptions:
WACC:
Airline 15.00%
Automobile 10.00%
AIR INDIA in '000
Initial Investment Required: $ 10,000
Annual Cash Flows in next 5 years: $ 1,000
Resale Value: $ 12,000
Cash Flows from Air India: Year 0 Year 1 Year 2
Initial Investment $ -10,000
Annual Cash Flows $ - $ 1,000 $ 1,000
Resale Value
Net Cash Flows: $ -10,000 $ 1,000 $ 1,000
Internal Rate of Return (IRR): 13.1%
JLR in '000
Initial Investment Required: $ 40,000.00
Annual Cash Flows in next 5 years: $ 3,800.00
Resale Value: $ 45,000.00
Cash Flows from JLR: Year 0 Year 1 Year 2
Initial Investment $ -40,000.00
Annual Cash Flows $ - $ 3,800.00 $ 3,800.00
Resale Value
Net Cash Flows: $ -40,000.00 $ 3,800.00 $ 3,800.00
Internal Rate of Return (IRR): 11.5%
DECISION: IRR <> WACC Accept/Reject
Air India 13.1% < 15.00% Reject
JLR 11.5% > 10.00% Accept
nd Tata Motors.
Year 3 Year 4 Year 5
$ 1,000 $ 1,000 $ 1,000
$ 12,000
$ 1,000 $ 1,000 $ 13,000
Year 3 Year 4 Year 5
$ 3,800.00 $ 3,800.00 $ 3,800.00
$ 45,000.00
$ 3,800.00 $ 3,800.00 $ 48,800.00
Valuation - Basics
Real Estate property
Cost of property $ 1,000,000
Annual Cash Flows $ 100,000
Rate of Return % 10.0%
Annual Cash Flows $ 100,000
Rate of Return % 10%
Value of Property $ 1,000,000
Valuing a Company
Scenario - I
Annual Cash Flows $ 100,000
Rate of Return % 10%
Value of Company $ 1,000,000
Scenario - II
Annual Cash Flows $ 100,000
Growth in cash flow % 2%
Rate of Return % 10%
Value of Company $ 1,250,000