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TIME VALUE OF MONEY - Coggle Diagram
TIME VALUE OF MONEY
Definition
A ringgit received today is worth more than a Ringgit received tomorrow
Ringgit received today can be invested to earn interest
depends on the rate of return
Time value of money quantifies the value of a Ringgit through time
Future Value of a Lump Sum
sum of money invested today will grow to in a given period of time
The process of finding a future value is called compounding.
Using Formula FVn = PV (1+i)n
Using Future Value Table FVn = PV (FVIF i%,n)
Present Value of a Lump Sum
what the value of a cash flow received in the future would be worth today (time 0)
The process of finding a present value is called “discounting” (hint: it gets smaller)
The interest rate used to discount cash flows is generally called the discount rate
Using your Formula PVn = FV [1 / (1+i)n ]
Using Future Value Table PVn = FV (PVIF i%,n)
Future Value of a Multiple Cash Flow
finite set of payments that an investor will receive or invest over time.
The future value of a cash flow stream is equal to the sum of the future values of the individual cash flows.
The FV of a cash flow stream can also be found by taking the PV of that same stream
FVn = PV (1+i) n-1 + PV (1+i) n-2 + PV (1+i) n-3 + PV (1+i) n-4
Present Value of a Multiple Cash Flow
PV of the cash flow stream is equal to the sum of the present value of each of the individual cash flows in the stream.
discounting the lump sum at the appropriate discount rate
PV = FV1 + FV2 + FV3 + FV4
(1+i)1 (1+i)2 (1+i)3 (1+i)4
Annuities
cash flows are all equal and occur at regular intervals.
annuities can be a fixed amount, an amount that grows at a constant rate over time
Ordinary annuities
cash flow occur at the end of the period
Annuity Due
cash flow occur at the beginning of the period
FVA = PMT (FVIFA i%, n)