Techniques of Time Value of Money
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Techniques of Time Value of Money
Compounding Technique or Future Value
Technique
-
Compounding technique is used to calculate the future value
of present money (cash flows). In this concept, the interest
earned on the initial principal amount becomes a part of the
principal at the end of the compounding period.
Discounting Technique or Present
Value
Technique-
Discounting technique is used to calculate the present value of
cash flows. The concept of this method is "what should be the
amount, we need to invest today" to get a specific amount in
future. This technique helps to ascertain the present value of
future cash flows by applying a discount rate.
Discounting converts future value amount
into present value amount. Similarly,
compounding converts present value
amount into future value amount
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Techniques of Time Value of Money include compounding and discounting. Compounding calculates future value while discounting determines present value. Learn how these techniques impact cash flows and investments.
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Presentation Transcript
Techniques of Time Value of Money Techniques of Time Value of Money Compounding Technique or Future Value Compounding Technique or Future Value Technique Technique- Compounding technique is used to calculate the future value of present money (cash flows). In this concept, the interest earned on the initial principal amount becomes a part of the principal at the end of the compounding period.
Discounting Technique or Present Discounting Technique or Present Value Value Technique Technique- - Discounting technique is used to calculate the present value of cash flows. The concept of this method is "what should be the amount, we need to invest today" to get a specific amount in future. This technique helps to ascertain the present value of future cash flows by applying a discount rate.
Discounting converts future value amount into present value amount. Similarly, compounding converts present value amount into future value amount
