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
Explain Interest rate risk Interest rate risk considers to interest rates changing not favorably before the swap dealer can lay off with an opposing counterparty the unplaced

Question : (a) Lucky Corporation is considering an investment in one of the two mutually exclusive proposals: Project A which involves an initial outlay of Rs 170,000 and Proj

(a) The position of an agency that sells a callable coupon bond. We supposed that coupon bond has a maturity of 3 years and is callable only at the second year. (b) The market t

what are the basic assumptions of financial management?

To understand how treasury spot rates are used to calculate the arbitrage-free value of the treasury security, we will take imaginary treasury spot rates (given i

Describe the Puttable, Convertible, Foreign and Eurobonds. With puttable bonds the release date is under control of the holder (that is the opposed of the callable bond case)

Q. Example on Controlling working capital? Describe how a manufacturing company could control its working capital levels and impact of the suggested control measures. Solut

As you checked the Answer Key to Question 6 in the Mastery Check from this lesson you may have noted that each year's net cash flows are calculated by adding depreciation back to n

Q. Working capital cycle? In a manufacturing concern the working capital cycle is start with the purchase of the raw material and ends with the realization of the cash from the

Q. Basic objectives of cash management? The basic objectives of cash management are two-fold: 1) To meet the cash disbursement needs (payment schedule); and 2) To minimize f