24. Time Value of Money

Try these first

1. 1.

   What is the formula for simple interest?

   Hint

   Remember, it only uses the principal!

2. 2.

   Name the three main reasons that explain TVM.

   Hint

   Think about factors that affect purchasing power.

3. 3.

   What does the Time Value of Money (TVM) refer to?

   • Money in the future will be worth more than today
   • Money today is worth more than in the future
   • Both statements are true

   Hint

   Consider how money can grow with time.

4. 4.

   True or False: Present value is the current worth of a future sum of money.

   • True
   • False

   Hint

   Think about the definition of present value.

5. 5.

   A company is considering a project with an upfront cost of ₹500,000 and expects to receive cash inflows of ₹120,000 annually for 7 years. If the required return is 10%, calculate the NPV of the project.

   Hint

   Use the NPV formula involving discounting cash flows.

6. 6.

   You decide to set aside ₹2,000 each year for 10 years in an account that earns 4% interest compounded annually. Calculate the future value of this annuity at the end of 10 years.

   Hint

   This involves the future value of an ordinary annuity formula.