CLASSIFICATIONS OF THE TIME VALUE OF MONEY - Accounts and Finance for Managers

The concept of time value of money can be classified into two major classifications:

  • Future value of money
  • Present value of money

Future value of money: It is further bifurcated into two different categories viz
Future value of single sum and Future value of an Annuity

Present value of money: It is further classified into two major classes viz
Present value of single sum and Present value of and Annuity
Future value of single sum:

  • It could be found from the inbound relationship in between the future value of money and present value of money.
  • FVn = PV(1+K)n
    FVn = Future Value of Cash Inflow
    PV = Initial Cash Flow
    K = Annual Rate of Return
    N = Life of Investment

Illustration

If you deposit Rs.1,000 today in a Indian bank which pays 10% interest, find out the future value of money after 3 years.
Future value of Rs.1,000 after three years will be = Rs.1,000(1+.10)3
= Rs.1,000(1.331)= Rs. 1,331
Doubling period: It is the period which makes the investment as "Doubled"

There are two different approaches viz

  • Rule of 72
  • Rule of 69

Rule of 72

The initial amount of investment gets Doubled within which 72/I
I = Interest Rate of the investment

Illustration

The amount of the investment is Rs.1,000. The annual rate of interest is 12%. When this amount of Rs.1,000 will get doubled ?
= 72/12 = 6 years

Rule of 69

The amount method is found to crude method in determining the doubling period which has its own limitations. The Rule of 69 was developed only in order to remove the bottlenecks associated with the early model of doubling period.

The rule of 69 is found to be a scientific method as well as rational method in determining the doubling period of the investment
=.35+ 69/I

Illustration

The amount of the investment is Rs.1,000. The annual rate of interest is 11% When this amount of Rs 1,000 will get doubled?
=.35+ 69/11= 6.6227 yrs


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