The time value of money will help us in our daily lives to make the right investment decisions. I have tried to explain this with a son (child) and parents example in this article, where parents are planning to inherit equallly to their three sons.

A Case Study to Know the Importance of Time Value of Money…

Three years ago, I got a client.

In addition, he is a high-income earner.

Moreover, he has two brothers, and my client is the elder son.

Again, 2nd Brother started his career recently.

And 3rd brother yet to start the career.

My client’s parents were looking to buy a house.

For buying this house, they need a housing loan.

and They do not have enough funds to buy the home with full money.

But the real twist is that they want to inherit this house to all three children after the loan got cleared in 21 years.

One more thing is parents asking my client to pay EMI for the first 7 years.

In addition, the 2nd son will pay the EMI from 8th year to 14th year, and the 3rd son will pay the next 7 years.

Moreover, the loan amount is 50 lakh, and the interest rate is 9% p.a.

And the house inflation expected is 12%.

Again, One more thing is

For simplicity purposes, I have not mentioned the down payment required for buying the house in this article.

Now, my clients want to know whether the decision of his parents to inherit after 21 years is the right one or not.

In addition, he also wants to know whether equal justice will be done in this inheritance plan of parents.

Then, I have applied “Time Value of Money” concept and gave my client my advice on the parents offer on

ineritance.

The time value of money concept always helps you to take the right money management and investment decisions in your life.

Now, We should calculate the rate of return (using the TVM concept)  that each son getting towards the house contribution

Imp Note…

For simplicity purposes, let’s assume that the total loan tenure is 6 years.

And three sons will pay EMI for a period of two years each.

Then, parents will inherit the house from the children equally.

1st Son Rate of Return using Time Value of Money Concept…

First, we should calculate the loan EMI.

Here, in the above image, you can see the EMI to be paid by all three sons is Rs. 90,000 per month.

Now we should calculate the sale price value of the house after 6 years using future value formulae.

Future value = Present Value*(1+R)^N

Now, you can see in the above image that the sale price of the house is approximately 98 lakh.

In addition, you should calculate the “xirr” for Frist’s cash flows to know the rate of return that he is getting.

First Son Rate of Return
S.No.	Date	Cash Flows
1	1/1/2024	-90127.69
2	2/1/2024	-90127.69
3	3/1/2024	-90127.69
4	4/1/2024	-90127.69
5	5/1/2024	-90127.69
6	6/1/2024	-90127.69
7	7/1/2024	-90127.69
8	8/1/2024	-90127.69
9	9/1/2024	-90127.69
10	10/1/2024	-90127.69
11	11/1/2024	-90127.69
12	12/1/2024	-90127.69
13	1/1/2025	-90127.69
14	2/1/2025	-90127.69
15	3/1/2025	-90127.69
16	4/1/2025	-90127.69
17	5/1/2025	-90127.69
18	6/1/2025	-90127.69
19	7/1/2025	-90127.69
20	8/1/2025	-90127.69
21	9/1/2025	-90127.69
22	10/1/2025	-90127.69
23	11/1/2025	-90127.69
24	12/1/2025	-90127.69
25	1/1/2026	0.00
26	2/1/2026	0.00
27	3/1/2026	0.00
28	4/1/2026	0.00
29	5/1/2026	0.00
30	6/1/2026	0.00
31	7/1/2026	0.00
32	8/1/2026	0.00
33	9/1/2026	0.00
34	10/1/2026	0.00
35	11/1/2026	0.00
36	12/1/2026	0.00
37	1/1/2027	0.00
38	2/1/2027	0.00
39	3/1/2027	0.00
40	4/1/2027	0.00
41	5/1/2027	0.00
42	6/1/2027	0.00
43	7/1/2027	0.00
44	8/1/2027	0.00
45	9/1/2027	0.00
46	10/1/2027	0.00
47	11/1/2027	0.00
48	12/1/2027	0.00
49	1/1/2028	0.00
50	2/1/2028	0.00
51	3/1/2028	0.00
52	4/1/2028	0.00
53	5/1/2028	0.00
54	6/1/2028	0.00
55	7/1/2028	0.00
56	8/1/2028	0.00
57	9/1/2028	0.00
58	10/1/2028	0.00
59	11/1/2028	0.00
60	12/1/2028	0.00
61	1/1/2029	0.00
62	2/1/2029	0.00
63	3/1/2029	0.00
64	4/1/2029	0.00
65	5/1/2029	0.00
66	6/1/2029	0.00
67	7/1/2029	0.00
68	8/1/2029	0.00
69	9/1/2029	0.00
70	10/1/2029	0.00
71	11/1/2029	0.00
72	12/1/2029	0.00
73	1/1/2030	3289704.48
xirr	xirr	8.64%

Here in the above image, you can see that the first son paid the EMI for 24 months, i.e., 2 years.

In addition, his share from the sale price of the house is approximately 32 lakh.

Moreover, the rate of return is 8.64%.

Similarly, we should calculate the “xirr” for other son’s cashflows.

2nd Sone Rate of Return using Time Value of Money Concept…

Second Son Rate of Return
1	1/1/2024	-1
2	2/1/2024	0
3	3/1/2024	0
4	4/1/2024	0
5	5/1/2024	0
6	6/1/2024	0
7	7/1/2024	0
8	8/1/2024	0
9	9/1/2024	0
10	10/1/2024	0
11	11/1/2024	0
12	12/1/2024	0
13	1/1/2025	0
14	2/1/2025	0
15	3/1/2025	0
16	4/1/2025	0
17	5/1/2025	0
18	6/1/2025	0
19	7/1/2025	0
20	8/1/2025	0
21	9/1/2025	0
22	10/1/2025	0
23	11/1/2025	0
24	12/1/2025	0
25	1/1/2026	-90127.69
26	2/1/2026	-90127.69
27	3/1/2026	-90127.69
28	4/1/2026	-90127.69
29	5/1/2026	-90127.69
30	6/1/2026	-90127.69
31	7/1/2026	-90127.69
32	8/1/2026	-90127.69
33	9/1/2026	-90127.69
34	10/1/2026	-90127.69
35	11/1/2026	-90127.69
36	12/1/2026	-90127.69
37	1/1/2027	-90127.69
38	2/1/2027	-90127.69
39	3/1/2027	-90127.69
40	4/1/2027	-90127.69
41	5/1/2027	-90127.69
42	6/1/2027	-90127.69
43	7/1/2027	-90127.69
44	8/1/2027	-90127.69
45	9/1/2027	-90127.69
46	10/1/2027	-90127.69
47	11/1/2027	-90127.69
48	12/1/2027	-90127.69
49	1/1/2028	0
50	2/1/2028	0
51	3/1/2028	0
52	4/1/2028	0
53	5/1/2028	0
54	6/1/2028	0
55	7/1/2028	0
56	8/1/2028	0
57	9/1/2028	0
58	10/1/2028	0
59	11/1/2028	0
60	12/1/2028	0
61	1/1/2029	0
62	2/1/2029	0
63	3/1/2029	0
64	4/1/2029	0
65	5/1/2029	0
66	6/1/2029	0
67	7/1/2029	0
68	8/1/2029	0
69	9/1/2029	0
70	10/1/2029	0
71	11/1/2029	0
72	12/1/2029	0
73	1/1/2030	3289704
xirr	xirr	14.64%

Now, in the above image, you see that the 2nd son paid EMI from 25th month to 48th month.

In addition, the sale price of the house is 32 lakh.

And the rate of return is 14.64%, which is higher than the first-son rate of return.

In addition, you can see I took -1 as the first cash flow.

Because the xirr formula will give the wrong answer if I enter “0” as the first cash flow.

But “-1” as the first cash flow investment will not make a huge difference for the rate of return calculation wth time value of money concept.

Finally, let’s calculate the rate of return for the 3rd son cash flows.

3rd Son Rate of Return Using Time Value of Money Concept…

Third Son Rate of Return
1	1/1/2024	-1
2	2/1/2024	0
3	3/1/2024	0
4	4/1/2024	0
5	5/1/2024	0
6	6/1/2024	0
7	7/1/2024	0
8	8/1/2024	0
9	9/1/2024	0
10	10/1/2024	0
11	11/1/2024	0
12	12/1/2024	0
13	1/1/2025	0
14	2/1/2025	0
15	3/1/2025	0
16	4/1/2025	0
17	5/1/2025	0
18	6/1/2025	0
19	7/1/2025	0
20	8/1/2025	0
21	9/1/2025	0
22	10/1/2025	0
23	11/1/2025	0
24	12/1/2025	0
25	1/1/2026	0
26	2/1/2026	0
27	3/1/2026	0
28	4/1/2026	0
29	5/1/2026	0
30	6/1/2026	0
31	7/1/2026	0
32	8/1/2026	0
33	9/1/2026	0
34	10/1/2026	0
35	11/1/2026	0
36	12/1/2026	0
37	1/1/2027	0
38	2/1/2027	0
39	3/1/2027	0
40	4/1/2027	0
41	5/1/2027	0
42	6/1/2027	0
43	7/1/2027	0
44	8/1/2027	0
45	9/1/2027	0
46	10/1/2027	0
47	11/1/2027	0
48	12/1/2027	0
49	1/1/2028	-90127.7
50	2/1/2028	-90127.7
51	3/1/2028	-90127.7
52	4/1/2028	-90127.7
53	5/1/2028	-90127.7
54	6/1/2028	-90127.7
55	7/1/2028	-90127.7
56	8/1/2028	-90127.7
57	9/1/2028	-90127.7
58	10/1/2028	-90127.7
59	11/1/2028	-90127.7
60	12/1/2028	-90127.7
61	1/1/2029	-90127.7
62	2/1/2029	-90127.7
63	3/1/2029	-90127.7
64	4/1/2029	-90127.7
65	5/1/2029	-90127.7
66	6/1/2029	-90127.7
67	7/1/2029	-90127.7
68	8/1/2029	-90127.7
69	9/1/2029	-90127.7
70	10/1/2029	-90127.7
71	11/1/2029	-90127.7
72	12/1/2029	-90127.7
73	1/1/2030	3289704
xirr	xirr	46.05%

Here, in the bbove table, you can see that the 3rd son paid the EMI from 49 months to 72 months.

And the rate of return generated for him is 46.05%.

Here, also, I have assumed first cash flow as “-1.”.

And the rate of return for the 3rd son is higher than of 2nd son rate of return.

Conclusion about the inheritance to the children…

In the above case study that we have assumed in this article, we have applied the “time value of money” concept.

And calculated the rate of return for the cash flows of each son.

After calculating the rate of returns, we came to know the rate of return of the 3rd son > the rate of return of the 2nd son > the rate of return of the 1st son.

Hence, it is very clear that every child or son is getting equal justice.

I.e., equal rate of return.

So, I have advised my client, i.e., the elder son, not to accept the deal of the parents.

And if parents are thinking of transferring their wealth to the child, TVM may help them make the correct decisions.

He is getting the least rate of return compared to other brothers.

Similarly, you can also use the “time value of money” concept in your life and make wise decisions.

Finally, It is almost imposible to tell the first son whether to accept parents offer or not without applying the “time value of money” concept for the scenario that we have taken in thsi article.

Read the article before buying your own house.

and also read about the NPS vatsalya scheme.

and why real estate is a bad investment.

Read How to Pay Less Interest on a Housing Loan.

Also, read How giving “Tithe” will make you poor?

And read article about – How call girls should save their money?

Also, read article about the Best Business Idea.

And read about – Why real estate is a bad investment?

Also read about is fd a good investment?…

And read about Life Insurance planning – how much cover you need?…