Future Value

Present Value
Present Value of Annuity
Future Value of Annuity
TIME VALUE OF MONEY
m n
m R PV FV
*
) / 1 ( *
Where:
FV: Denotes future value
PV: Denotes Present Value
R: Denotes the annual rate of interest
M : Denotes the period of compounding
N : Denotes the number of years
Calculate the future value of Rs.1000
invested @ 4% for 4 years (Annual
Compounding). What if the rate is
compounded semi-annually?
Answer
Annual Compounding 1169.86

Semi-annual compounding 1171.66

m n
m R PV FV
*
) / 1 ( *
Here
m n
m R
*
) / 1 (
Is termed as future value interest factor. The value of this can be directly
taken from the following table, by looking at R/m rate against n*m period
Period 1% 2% 3% 4% 5%
1 1.010 1.020 1.030 1.040 1.050
2 1.020 1.040 1.061 1.082 1.103
3 1.030 1.061 1.093 1.125 1.158
4 1.041 1.082 1.126 1.170 1.216
5 1.051 1.104 1.159 1.217 1.276
6 1.062 1.126 1.194 1.265 1.340
7 1.072 1.149 1.230 1.316 1.407
8 1.083 1.172 1.267 1.369 1.477
9 1.094 1.195 1.305 1.423 1.551
10 1.105 1.219 1.344 1.480 1.629
11 1.116 1.243 1.384 1.539 1.710
12 1.127 1.268 1.426 1.601 1.796
Future Value Interest Factor
m n
m R
FV
PV
*
) / 1 (

Where:
FV: Denotes future value
PV: Denotes Present Value
R: Denotes the annual rate of interest
M : Denotes the period of compounding
N : Denotes the number of years
Calculate the present value of Rs.1000
payable at the end of 4 years @ of 4%.
Answer
854.80
m n
m R
FV
PV
*
) / 1 (

Here the fraction

m n
m R
*
) / 1 (
1

Is termed as present value interest factor. The value of

this can be directly taken from the following table, by
looking at R/m rate against n*m period

Periods/Interest
Rate 0.50% 1% 1.50% 2% 2.50% 3% 3.50%
1 0.995 0.99 0.9852 0.9803 0.9756 0.9708 0.9661
2 0.99 0.9802 0.9706 0.9611 0.9518 0.9425 0.9335
3 0.9851 0.9705 0.9563 0.9423 0.9285 0.9151 0.9019
4 0.9802 0.9609 0.9421 0.9238 0.9059 0.8884 0.8714
5 0.9753 0.9514 0.9282 0.9057 0.8838 0.8626 0.8419
6 0.9705 0.942 0.9145 0.8879 0.8622 0.8374 0.8135
7 0.9656 0.9327 0.901 0.8705 0.8412 0.813 0.7859
8 0.9608 0.9234 0.8877 0.8534 0.8207 0.7894 0.7594
9 0.9561 0.9143 0.8745 0.8367 0.8007 0.7664 0.7337
10 0.9513 0.9052 0.8616 0.8203 0.7811 0.744 0.7089
11 0.9466 0.8963 0.8489 0.8042 0.7621 0.7224 0.6849
12 0.9419 0.8874 0.8363 0.7884 0.7435 0.7013 0.6617
Present Value Interest Factor
Present Value of Annuity
Annuity means equal payments made annually.
m m m
m R
A
m R
A
m R
A
PVA
* 3 * 2 * 1
) / 1 ( ) / 1 ( ) / 1 (

The objective is to compute the present value of equal annual payments.

Assuming an amount A is paid at the end of every year for 3 years.
So the present value of all the three payments right now is:
Rs.8000 is deposited by Mr. Ram every
year for 3 years. The deposit is made at
the end of each year. The bank offers
interest of 3% compounded annually.
What is the present value of the annuity?
High School Algebra you need to
know to Solve Time value of Money
Problems
Geometric Progression
Sum of a geometric series of n numbers.
S= a + aq
1
+ aq
2
. aq
n -1
---- 1
a is the first term
q is the ratio
n is the number of terms
Sq= aq
1
+ aq
2
. + aq
n -1
+aq
n
-----------2
Equation 1- equation 2 Gives
S(1-q) = a - aq
n




Present value of an annuity
Find the a, q and n and substitute in the
formula to get the result
3 2 1
) 03 . 1 (
8000
) 03 . 1 (
8000
) 03 . 1 (
8000

PVA
Present Value of an Annuity
for this geometric series:

a = first term =8000/1.03 =7766.99

q= ratio = 1/1.03 =0.970874

n=number of terms =3


S = 22628.89
Generalizing the formula for N
terms
Answer
22,628.90
22632
Using tables
Using formula
m m m
m R
A
m R
A
m R
A
PVA
* 3 * 2 * 1
) / 1 ( ) / 1 ( ) / 1 (

Here the expression:

m m m
m R m R m R
* 3 * 2 * 1
) / 1 (
1
) / 1 (
1
) / 1 (
1

Is termed as present value annuity factor and can be directly seen from the
table for R/m rate for a period of 3 years.
Periods/
Inter
est
Rate 0.50% 1% 1.50% 2% 2.50% 3%
1 0.995 0.99 0.9852 0.9803 0.9756 0.9708
2 1.985 1.9703 1.9558 1.9415 1.9274 1.9134
3 2.9702 2.9409 2.9122 2.8838 2.856 2.8286
4 3.9504 3.9019 3.8543 3.8077 3.7619 3.717
5 4.9258 4.8534 4.7826 4.7134 4.6458 4.5797
6 5.8963 5.7954 5.6971 5.6014 5.5081 5.4171
7 6.862 6.7281 6.5982 6.4719 6.3493 6.2302
8 7.8229 7.6516 7.4859 7.3254 7.1701 7.0196
9 8.779 8.566 8.3605 8.1622 7.9708 7.7861
10 9.7304 9.4713 9.2221 8.9825 8.752 8.5302
11 10.677 10.367 10.071 9.7868 9.5142 9.2526
12 11.618 11.255 10.907 10.575 10.257 9.954
Present Value Annuity Factor
Future Value of Annuity
Annuity means equal payments made annually.
A m R A m R A FVA
m m

* 1 * 2
) / 1 ( * ) / 1 ( *
The objective is to compute the future value of equal annual payments.
Assuming an amount A is paid at the end of every year for 3 years.
So the present value of all the three payments at the end of three years is:
Rs. 8000 is deposited by Mr. Ram every
year for 3 years. The deposit is made at
the end of each year. What is the future
value of the annuity at the end of 3
years? (Assume a rate of 3% annually
compounding)
A=8000
q=1+r
n=3

Answer
24,727.20
Using formula
Using tables
24,720
A m R A m R A FVA
m m

* 1 * 2
) / 1 ( * ) / 1 ( *
Here the expression
m m m
m R m R m R
* 0 * 1 * 2
) / 1 ( ) / 1 ( ) / 1 (
Is termed as future value annuity factor. The value of this can directly
be seen from future value annuity table by looking for R/m rate along
with 3 years time period.
Period 1% 2% 3% 4% 5%
1 1.000 1.000 1.000 1.000 1.000
2 2.010 2.020 2.030 2.040 2.050
3 3.030 3.060 3.091 3.122 3.153
4 4.060 4.122 4.184 4.246 4.310
5 5.101 5.204 5.309 5.416 5.526
6 6.152 6.308 6.468 6.633 6.802
7 7.214 7.434 7.662 7.898 8.142
8 8.286 8.583 8.892 9.214 9.549
9 9.369 9.755 10.159 10.583 11.027
10 10.462 10.950 11.464 12.006 12.578
11 11.567 12.169 12.808 13.486 14.207
12 12.683 13.412 14.192 15.026 15.917
Future Value Annuity Factor
Calculate the present value of an annuity
of Rs.8000 starting at the end of 3 years
and lasting till the end of 7
th
year.
Assume a discount rate of 10%.
25050.93
An investment company offers to pay
Rs.25,959 at the end of 10 years to
investors who deposit Rs.1000 annually.
What is the implied rate of return?
20%
At the time of his retirement Mr. Swamy
is given a choice between two
alternatives:
Annual pension of Rs.20,000 as long as he
lives.
A lump sum payment of Rs.1,50,000.
If he expects to live for 15 years and the rate
is 15%, then which alternative should
he select?
Answer
Present value of annuity is 1,16,940
So Mr. Swamy should choose option (b)
Payment of a 9 year annuity of Rs. 10,000
will begin at the end of 7 years. What is
the present value of the annuity? Assume
a rate of 12%.
Answer
27012.96
Assume that you are given a choice
between incurring an immediate outlay of
Rs.10,000 and having to pay Rs.2310 a
year for 5 years (first payment due one
year from now); the discount rate is 11%.
What would be your choice? Will your
answer change if Rs2310 is paid in the
beginning of each year for 5 years?
Answer
(a) Present Value of annuity is 8537.76

(b) Present value of annuity is 9475.62
Question
If a person deposits Rs.1000 on an
account that pays him 10% for the first five
years and 13% for the following eight
years, what is the annual compound rate
of interest for the 13 year period
11.83%
EFFECTIVE RATE
Effective rate of interest is that annual rate
which produces the same effect as that
produced by nominal rate when
compounded under less than annual time
periods.
If 9% p.a. nominal rate is compounded
semi-annually then what is the effective
rate of interest?
9.2025%
Question
If the nominal rate of interest is 12% per
annum calculate the effective rate of
interest when a sum is compounded (a)
annually (b) semi-annually (c ) quarterly
12%
12.36%
12.5509%
Question
If the nominal rate of interest compounded
quarterly results in effective rate of 18%,
then calculate the nominal rate of interest.
16.8987%

Question
City Finance Ltd. has various deposit
schemes which offer the same effective
rate of interest as 10% per annum
compounded half yearly. If you save
Rs.100 at the beginning of every month
with CFL in a monthly recurring deposit
scheme which has a maturity of three
years, then what will be the maturity value
at the end of three years?
Rs.4202.21
Rule of 72
The period within which the amount will be
doubled is obtained by dividing 72 by the
rate of interest.
Question
As per the rule of 72 in how many years
will the amount deposited today at an
interest rate of 16% double?
4.5YEARS

If you deposit Rs.10,000 today at 12% rate
of interest, in how many years does this
amount grow to Rs.80,000 (Rule of 72)
Rule of 69
Doubling period = 0.35+69/ Interest rate
What is the rate of interest when the
doubling period is 7 years 4 months?
9.88%
If the long term rate of interest offered by a
bank is 6.19% per annum. What is the
doubling period under rule of 69?
11.497 yrs
PERPETUITY
k
A
PVP