Time Value of Money.

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Presentation transcript:

Time Value of Money

Introduction Time value of money is an individual’s preference for possession of a given amount of money now rather than the same amount at some Future period.

Reasons for this preference Risk Preference for Consumption (Urgency) Investment Opportunities. Example – A person receives Rs. 100 now or 105 after one year. (R = 5%). He will be indifferent between two options.

Rate of Return Time value of money is generally expressed by Rate of Return. Knowledge of Required rate of Return helps an individual or a firm in making investment decision. Example -

Simple Interest – The interest that is calculated only on the original amount (Principal) Compound Interest – The interest calculated on Original amount (Principal) as well as on interest earned.

n For Numericles refer to the class notes or text book.