Understanding Techniques of Time Value of Money
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
