INFLATION ALWAYS ERODES THE VALUE OF MONEY
TVM is the idea that money that is available at the present time is worth more than the same amount in the future.
In simple language it means that worth of a rupee received today is more than the worth of a rupee to be received in future.
Reason for Time Preference of Money
Four main reasons may be attributed to the individual's time preference for money:
Techniques of Time Value of Money
Two most common methods of adjusting cash flows time value of money:
Compounding - Process of calculating future values of cash flows.
Discounting - Process of calculating present values of cash flows.
Understand some Variables
Present value (PV) -It is the money you have at the present time, your initial investment for your future.
Future value (FV) - This is your ending amount at a point in time in the future. It should be worth more than the present value.
Number of periods (N) This is the timeline for your investment. It is usually measured in years.
Interest rate (I) This is the growth rate of your money over the lifetime of the investment. It is stated in a percentage value, such as 10%
Future Value & Compounding
Compounding is used to find the future values of all the cash flows at the end of time horizon at a rate of Interest.
Interest
Compound Interest is the interest that is received on the original amount (principal) as well as on any interest earned but not withdrawn during earlier periods.
A=P(1+r/n)^nt
A- Final Amount
P-Initial principal amount
r- rate of interest
n- no of times interest is compounded per year
t- time in years
Simple Interest is the interest that is calculated only on the original amount (principal).
A=P(1+rt)
A- Final Amount
P-Initial principal amount
r- rate of interest
t- time in years