Explain compound value concept, Financial Management

Q. Explain Compound Value Concept?

The Compound Value Concept is used to find out the FV of present money. It is the same as the concept of compound interest, wherein the interest earned in a preceding year is reinvested at the Prevailing rate of interest for the remaining period. Thus, the accumulated amount (principal + interest) at the end of a period becomes the principal amount for calculating the interest for the next period. The compounding technique to find out the FV of present money can be explained with reference to:

1) The FV of a single present cash flow, and

2) The FV of a series of cash flows.

1) FV of a Single Present Cash Flow: the future value of a single cash flow is defined in term of equation as follows: FV = PV (1 + r)n Where, FV = Future value PV = Present value (given) .r = % Rate of interest, and n = Time gap after which FV is to be ascertained.

The above equation explains that the FV depends upon the combination of three variables i.e. the PV, the r, and the n. If anyone of these three variables changes, the FV will also change. There can be an almost infinite number of combinations of these three variables and therefore there can be corresponding infinite number of FVs. For example, one may be interested to find out then FV of Rs. 1,000 at 10% after 7 years or of Rs. 5,000 at 11% after 9 years or Rs. 50,000 at 16% after 3 years and so on. Every time the tedious calculations as per Equation are to be to find out the future value.

Posted Date: 6/19/2013 6:59:53 AM | Location : United States







Related Discussions:- Explain compound value concept, Assignment Help, Ask Question on Explain compound value concept, Get Answer, Expert's Help, Explain compound value concept Discussions

Write discussion on Explain compound value concept
Your posts are moderated
Related Questions
When are the financial crises occurred? Financial crises arise where there is a large raise in asymmetric information into financial markets. Asymmetric information arises whil

What are the time dimensions of the income statement, the balance sheet, and the statement of cash flows? Hint: Are they videos or still pictures?  Explain. Sol. The i

What is the difference between business risk and financial risk? Business risk considers to the uncertainty a company has regarding to its operating income (as well termed as ear

Most of the time, an investor buys a bond between coupon payments. In such transaction, the buyer must compensate the seller of the bond for the

who are the participants in the hedge funds industries

The distinct features of CDs are: CD is a document of title to a time deposit and is distinct from conventional time deposit with respect to negotiability and marketability.

RELATIONSHIP OF FINANCIAL MANAGEMENT WITH OTHER BUSINESS FUNCTIONS

Predicting Cross-Sectional Returns If the market is assumed to be efficient, all securities should lie along the security market line that relates the expected rate of return t

How and why does working capital influence the incremental cash flow estimation for a planned large capital budgeting project?  Explain. Many large projects need additional worki

Describe the benefits of Wealth maximisation criterion Value of an asset must be viewed in terms of the benefits it can produce. Worth of a course of action can similarly be ju