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    Interest, Present & Future Value, NPV Explained

    Uploaded by

    Alfi Shahrier Niloy
    The slides explain the two types of interests, their formula derivation, present & future value, net present value.

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    © All Rights Reserved
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    Interest, Present & Future Value, NPV Explained

    Uploaded by

    Alfi Shahrier Niloy
    47 views8 pages
    The slides explain the two types of interests, their formula derivation, present & future value, net present value.

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    © © All Rights Reserved

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    PPTX, PDF, TXT or read online from Scribd

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    The slides explain the two types of interests, their formula derivation, present & future value, net present value.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    47 views8 pages

    Interest, Present & Future Value, NPV Explained

    Uploaded by

    Alfi Shahrier Niloy
    The slides explain the two types of interests, their formula derivation, present & future value, net present value.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    You are on page 1of 8

    INTEREST: RENT ON MONEY

    I borrowed $100
    I returned $100 one year later. So, no rent paid.

    I borrowed $100
    I returned 110$ one year later. So I paid an extra rent of $10 for using
    that $100 in one year. This $10 rent is interest.
    Types of
    Interest

    Simple Compound
    Interest Interest

    Simple Interest: The interest is calculated on a constant principal.

    Compound Interest: After a payment, the interest is added to the principal.


    The interest of the next payment is calculated on this new principal.
    p = principal; rate of risk free interest= r; time period= n

    Time Interest Total Payment


    0 0 p
    1 rp P + rp = P (1+r) SIMPLE
    2 rp + rp= 2rp p + 2rp = P (1+2r) INTEREST
    ……. ……. …….
    n nrp P + nrp = p (1+ nr)

    If “p” amount of money is deposited for n years of time & risk free rate of
    interest is r,

    Therefore, total interest i = pnr


    Total payable amount c = p (1+nr)
    p = principal; rate of risk free interest= r; time period= n

    Time Total Payment


    0 p
    1 p + rp = p (1+r) = New Principal (NP)
    COMPOUND
    NP + NP.r = p(1+r) + p(1+r).r
    2
    = p(1+r) (1+r)= p(1+r)2
    INTEREST
    ……. …….
    n P (1+r)n

    If “p” amount of money is deposited for n years of time & risk free rate of
    interest is r,

    Therefore, Total payable amount c = p (1+r)n


    Bank Discount Rate: Simple Interest

     Formula:

    Where n= number of payments;


    discount rate= rate of interest

     Effective Interest Rate, I =


    effective
    1. Present Value & Future Value:

    0 1 2 3 ………. n

    0 is the Present Time. In other words, 0 means Today.


     
    Formula:
    If Future Value = FV & Present Value = PV; period = n; rate of interest = r
    Then, &
    Scenario 1.01: I shall either pay you $100 today or $110 one year later. Considering that current rate
    of risk free interest is 5%, which one will be more profitable for you?

    After
    Today  Here, FV= $110; Time period, n= 1 year; rate of
    Year 1
    interest r = 5%;
    Choice 1 $100
    Therefore,
    Choice 2 $104.76 $110

    Present Value of $110

    Scenario 1.02: I shall either pay you $105 today or $110 one year later. Considering that current rate
    of risk free interest is 5%, which one will be more profitable for you?

    After  Here, FV= $110; Time period, n= 1 year; rate of


    Today
    Year 1 interest r = 5%;
    Choice 1 $105
    Therefore,
    Choice 2 $104.76 $110

    Present Value of $110


    2. Net Present Value (NPV): Summation of Present Value of All Payments.
    $200 $100 $500 $300 $200 $100 Rate of risk free
    Scenario
    2.01: interest, r = 6%
    0 1 2 3 4 5

      $ 100 $ 500 $ 3 00 $ 2 00 $ 100


    𝑁𝑃𝑉 =$ 200+ + 2
    + 3
    + 4
    + 5
    =$ 1224.368
    (1+6 % ) (1+6 %) (1+6 %) (1+6 % ) (1+6 %)

    Scenario 2.02: A bank will provide interest at 1% if deposited for 1 year & 5% if deposited for 2 years.
    Find out which of the following choices is best for investment.
     𝑷𝑽 = $ 𝟏𝟏𝟎 $ 𝟏𝟏𝟎
    After After = = $ 𝟗𝟗. 𝟕𝟕
    Today (𝟏+𝟓 %)
    𝟐
    𝟏 .𝟎𝟓
    𝟐
    Year 1 Year 2
    Choice 1 $100  

    Choice 2 $99.77 x $110


    Choice 3 $20 $50 $35 PV = $101.25

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