Question

CASE STUDY

Mr Sehwag invests Rs 2000 every year with a company, which pays interest at 10% p.a. He allows his deposit to accumulate at C.I. Find the amount to the credit of the person at the end of 5th year. Answer the following question.

Q1. What is the Time Value of Money concept.

Q2. What do you mean by present value of money?

Q3. What is the Future Value of money.

Q4. What the amount to be credited at the end of 5th year.

Answer 1

Q1)	Simply stated the concept of Time value of Money states that value of the same amount of money received at two different points in time will differ and will depend upon which is received earlier. The difference in value of money at two diferent times will depend on factors common to every body such as inflation as well as factors unique to an individual or an enterprise such as the cost at which one can borrow money. By way of an example, funds remaining uninvested will lose value at the rate of inflation of a country.
Q2)	The present value of money represents the value of future cash flows discounted at a rate appropriate to the individual or enterprise. This discounting rate may represent the cost of borrowing funds or the opportunity cost of funds invested. This concept is quite useful in decision making especially in the context of Net Present value of a project which helps one determine the profitability or otherwise of a project. the present value of a cash flow may be determined by dividing the cash flow by (1+r)^n where "r" is the discounting rate and "n" is the period at which the cash flow is expected to arise, the current year being the base year. "n" of the first year is 1, 2nd year 2 and so on. Determining "r" or the discounting rate requires a good deal of data and judgement as it may vary quite significantly under different situations.
Q3)	Future value of money is a concept that is the mirror image of the Present value of money. To calculate the expected future value of money, the present cash flows would be multiplied by (1+r)^n where "r" is the discounting rate, generally the cost of capital or the opportunity cost of funds invested and "n" represents the year to which the future cash Flow pertains to.
Q4)	Interest Rate	10%
	Years	1	2	3	4	5
	Regular Investment	2,000.00	2,000.00	2,000.00	2,000.00	2,000.00
	Amount Reinvested		2,200.00	4,620.00	7,282.00	10,210.20
	Total investment	2,000.00	4,200.00	6,620.00	9,282.00	12,210.20
	Interest	200.00	420.00	662.00	928.20	1,221.02
	Amount to the credit of Mr Sehwag at the end of the 5th year is
	Amount standing invested at the end of Year 5				12,210.20
	Amount of interest for the 5th Year				1,221.02
	Total amount to the Credit of Mr Sehwag at the end of the 5th year				13,431.22