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A comprehensive introduction to the concept of time value of money, explaining the difference between simple and compound interest and the importance of cash flow diagrams. It includes illustrative examples and formulas for calculating future value, present value, and equivalent cash flows. Suitable for students studying finance, economics, or related fields.
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How to determine, today, the value
(monetary) of cash transactions that are
expected in the future?
To have X amount of money at any
future point of time, what should one
posses now?
Investing now or holding it for future
investment?
Where to invest? Bank, Alternative-1 or
Alternative-2 etc.?
TIME VALUE OF
MONEY
CASH FLOW DIAGRAM
A cash flow diagram is a graphically presentation of
the timing of the cash flows as well as their nature as
either inflows or outflows.
All the transactions are depicted at the end of year
(EOY)
Cash Inflow (Arrow Upward)
Cash Outflow (Arrow Downward)
CASH FLOW DIAGRAM
SYMBOLS & TERMINOLOGY
P= value or amount of money at present , Also referred as present
worth (PW), present value (PV), net present value, discounted cash
flow and Capital Cost.
F=Value or amount of money at future time. Also F is called future
worth (FW) and future value (FV)
A= Series of consecutives, equal, end of period amounts of money
(Receipts/disbursement)
N or n= Number of interest period; years, months or days
i= interest rate per time period; percent per year
t=time, stated in periods; years, months or days
EQUIVALENCE OF CASH FLOW
Economic equivalence is a
combination of interest rate and
time value of money to determine
the different amounts of money at
different points in time that are
equal in economic value.
Relationship between P and F.
Relationship between P and A
Relationship between P and G
Relationship between A and G
RELATION BETWEEN
“P” & “F”
The notation in parenthesis can be read as follows:
“To find a future sum F, given a present sum, P, at an
interest rate i per interest period and n interest periods
hence ” OR simply Find F, given P, at I, over n
Future Value Interest Factor at ‘i’ rate of
interest for ‘n’ time periods
PROBLEM
If you wish to have $ 12000 in a
saving account at the end of 5
years and 5% interest will be paid
annually, how much should you put
into saving account now?
F = P (1 + i)
n
n
N
N
Associate Professor
Mechanical Engineering Department
Z.H. College of Engineering & Technology, AMU, Aligarh
Find the value of the unknown
quantity “A” in the cash flow below
to establish the equivalence of cash
inflows and outflows. Let i=12% per
year.
