24.1. Concept of Time Value of Money

Try these first

1. 1.

   Define Time Value of Money?

   Hint

   Think about earning potential and inflation.

2. 2.

   What does inflation do to purchasing power?

   Hint

   Consider how prices change over time.

3. 3.

   What does the concept of TVM suggest?

   • Money today is worthless
   • Money today is more valuable than future money
   • Money loses value immediately

   Hint

   Think about earning interest.

4. 4.

   True or False: Risk increases the value of future money.

   • True
   • False

   Hint

   Consider how future uncertainty affects value.

5. 5.

   You have ₹8,000 today. If you invest this at an annual interest rate of 7% compounded annually, what will it amount to in 4 years?

   Hint

   Use the FV formula for compound interest.

6. 6.

   If you desire to have ₹20,000 in 3 years, what is the present value you need to invest today at an interest rate of 5%?

   Hint

   Consider the PV formula to find how much to invest now.