Chapter 2
Time Value of Money
OBJECTIVES
Calculate the future value of a single cash flow at a given interest rate.
Calculate present value of a single cash flow occurring at some point in time in the
future.
Calculate the future value of a series of cash flow.
Calculate the present value of a series of cash flow.
Compare interests quoted on a different basis.
Prepare loan amortization schedule.Consider the following situations:
- You expect a liability of Rs 100,000 in 5 years and you wish to know how much you should set aside to-
day to meet the liability. - Your car dealer offers you two schemes: A and B. Under scheme-A, you can borrow the entire amount at
an interest rate of 15 percent. Under scheme-B, the car dealer gives a discount of 10 percent on the sticker
price but the interest charged on the amount borrowed would be 19 percent. You have to decide on the
scheme. - You come across advertisements inserted by two banks in a daily. Bank-A offers 13 percent interest per
annum on deposits. Bank-B offers 12 percent semiannual interest. You have to choose between these
banks.
These are some of the financial decisions you may have to make in your personal or executive life. This
chapter answers questions like: Why is a rupee available today not the same as a rupee available in the
future? What amount should you set aside today so as to receive a specified amount in the future? When can
you be indifferent between some amount available today and some amount available in the future?