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CHAPTER 10: TIME VALUE OF MONEY, NUR ARISSA BINTI MOHAMAD 2019416444…
CHAPTER 10: TIME VALUE OF MONEY
Time value of money quantifies the value of a Ringgit through time
Basic concept
Present value
Present value of lump sum
determine what the value of a cash flow received in the future would be worth today (time 0)
Formula
PVn = FV [1 / (1+i)n ]
Future Value Table
PVn = FV (PVIF i%,n)
Present Value of a Multiple Cash Flow
FV of the cash flow stream and discounting the lump sum at the appropriate discount rate
Formula
PV = FV1 + FV2 / (1+i)1 (1+i)2
Future Value Table
PV n = FV (PVIF 10%,1)+ FV (PVIF 10%,2)
Annuities
Future value of Ordinary Annuities
Formula
(1 + i )n - 1
FVA = PMT -----------------
i
FVIFA Table
FVA = PMT (FVIFA i%, n)
Future value of Annuities Due
Formula
(1 + i )n - 1
FVA = PMT ----------------- X (1+i )
i
FVIFA Table
FVA = PMT (FVIFA i%, n) X (1+i )
Present Value of Ordinary Annuities
PVA = PMT (PVIFA i%, n)
Present value of Annuities Due
Formula
1 - (1 + i )-n
PVA = PMT ----------------- X (1 + i )
i
PVIFA Table
PVA = PMT (PVIFA i%, n) X (1 + i )
Future value
Future Value of a Multiple Cash Flow
A cash flow stream is a finite set of payments that an investor will receive or invest over time.
Formula
FVn = PV (1+i) n-1 + PV (1+i) n-2
Future Value Table
FV = PV(FVIF i%,n-1)+PV(FVIF i%,n-2)
Future value of lump sum
determines the amount that a sum of money invested today will grow to in a given period of time
Future Value Table
FVn = PV (FVIF i%,n)
Formula
FVn = PV (1+i)n
Different Compounding period
Interpolation
Process of determining the exact rate of interest (i) or the exact period of time (n).
Interest (before) +
(factor value (before) – calculated factor value) / (factor value (before) – factor value (after)) x
difference between interest after and before
NUR ARISSA BINTI MOHAMAD 2019416444 KBA2462A FIN420
