Compounding technique for calculating time value of money, Financial Management

COMPOUNDING TECHNIQUE is the method of calculating the future values of cash flows and involves calculating compound interest.  Under this process, interest is compounded when the amount earned on an initial deposit (the initial principal) becomes part of the principal at the end of the first compounding period. Principal refers to the amount of money on which interest is received that is, in compounding, future values of cash flows at a given interest rate at the end of the specified period of time are found. The future value (F) of a lump sum today (P) for n periods at i rate of interest is given by the formula

                                       Fn = P(1+i)n= P(CVFn,i).

And the compound value factor can be found out by referring to the table of compound values.  For example:  if Rs 1000 is invested @ 10% compound interest for 3 years, the return for first year will be

Amount at the end of the 1st year = (1000) + (1000 x 0.10) = Rs, 1,100

Amount at the end of the 2nd year = (1000) + (1100 x 0.10) = Rs, 1,210

Amount at the end of the 3rd year = (1000) + (1210 x 0.10) = Rs, 1,331

The compound interest phenomenon is most generally associated with several savings deposited with them. As the interest rate increases for some given year, the compound interest factor also increases.  Therefore, the higher the interest rate, the greater is the future sum.

Posted Date: 10/15/2012 8:56:41 AM | Location : United States

Related Discussions:- Compounding technique for calculating time value of money, Assignment Help, Ask Question on Compounding technique for calculating time value of money, Get Answer, Expert's Help, Compounding technique for calculating time value of money Discussions

Write discussion on Compounding technique for calculating time value of money
Your posts are moderated
Related Questions
Question : (a) A project must have a useful purpose. Therefore, as a project is evaluated, the team should determine the requirements of the local community and industry. These

Medium-term notes are debt instruments that can be offered continuously to an investor. An agency of the issuer offers these; and these are avai

Q. What do you know about sinking funds? sinking funds : quite often, one may be interested to accumulate a target amount over a given period inclusive of interest for the peri

The net income of Novis Corporation is $45,000.  The company has 20,000 outstanding shares and a 100 percent payout policy.  The expected value of the firm one year from now is $1,

What remains of an organization revenue after all expenses and taxes have been paid.

Financial statement analysis report: 1. Perform a comparative analysis (horizontal analysis). Analyze two items on the balance sheet and two items on the income statement for

Discuss the different ways political events in a host country may affect local operations of an MNC. Answer:  The answer can be organized based on the three types of political ri

Demand and Supply Shocks The influence of the above macroeconomic factors on the economic performance can be analyzed by classifying their impact on the economy as a supply or

Harley Davidson purchases components from three suppliers. Components purchased from Supplier A are priced at $ 5 each and used at the rate of 240,000 units per year. Components pu

A regional division of a water company is upgrading its water filtration & purification plant; the new system is expected to last 20 years & to cost $40m. The parent company has ha