4: Introduction to Time Value of Money (TVM) : Part 4

Today, we see the examples of investment decisions involving the time value of money in Indian Rupees (INR) for various scenarios:

Simple Investing: You have 50,000 INR to invest, and you expect an annual interest rate of 6%. You decide to invest it for 3 years. To calculate the future value of your investment:

Future Value = Present Value * (1 + Interest Rate)^Number of Years

Future Value = 50,000 * (1 + 0.06)^3 = 59,058 INR.

After 3 years, your investment will be worth 59,058 INR.

Investing in a Capital Asset: Suppose you are considering purchasing a piece of land for 5,00,000 INR, and you anticipate that the land will appreciate at an annual rate of 4%. If you plan to hold the property for 10 years:

Future Value = Present Value * (1 + Appreciation Rate)^Number of Years Future Value = 5,00,000 * (1 + 0.04)^10 = 7,17,470 INR

The property is projected to be worth 7,17,470 INR in 10 years.

Loan Amortization Schedule: You take out a 20-year home loan of 20,00,000 INR at a fixed annual interest rate of 7%. To determine your monthly mortgage payments and create an amortization schedule, you can use time value of money principles. Using a mortgage calculator or spreadsheet, you can find that your monthly payment is approximately 16,029 INR.

Over the life of the loan, you'll pay more in interest at the beginning, and as you make payments, the interest decreases while the principal increases.

Retirement Planning: You want to retire in 25 years and need to determine how much you should save each month to have 50,00,000 INR by then. Assuming an annual return of 8%, you can use the future value of annuities formula:

Monthly Savings = [Future Value / ((1 + Interest Rate)^Number of Years)] * [(1 - (1 + Interest Rate)^(-Number of Months)) / Interest Rate]

Monthly Savings = [50,00,000 / ((1 + 0.08)^25)] * [(1 - (1 + 0.08)^(-25*12)) / 0.08] Monthly Savings ≈ 12,479 INR.

To accumulate 50,00,000 INR in 25 years with an 8% annual return, you need to save approximately 12,479 INR per month.

Saving for a Particular Goal: You want to save 2,00,000 INR for a down payment on a home in 4 years. If you can invest your savings at an annual interest rate of 5%, you can calculate how much you need to save each month.

Monthly Savings = [Future Value / ((1 + Interest Rate)^Number of Years)] * [(1 - (1 + Interest Rate)^(-Number of Months)) / Interest Rate]

Monthly Savings = [2,00,000 / ((1 + 0.05)^4)] * [(1 - (1 + 0.05)^(-4*12)) / 0.05]

Monthly Savings ≈ 3,675 INR.

You need to save approximately 3,675 INR each month to reach your 2,00,000 INR goal in 4 years.

Assessment of Personal Loans: When evaluating personal loans, consider factors like interest rate, loan term, and the impact of compounding. For instance, if you're offered a 1,00,000 INR loan at an annual interest rate of 10% for 3 years, you can calculate the total repayment amount and the monthly payment using a loan amortization formula to decide if the loan is suitable for your financial situation.

Authored By

Seshadri Krishnaswamy Iyengar

Mentor - StockEazy Financials