1. Time Value of Money

2. Money has a time value because of the following reasons
Individuals generally prefer current consumption
The rupee received today can be employed profitably to give higher value than the rupee to be received tomorrow.

3. Aspects
1. Compensation for uncertainty 2. Preference for present consumption 3. Re-investment Opportunity

4. Valuation concepts
It is clear that a person will have to pay in future more for a rupee received today.
There are two concepts:
Compound Value concept
Present value concept

5. Compound value concept
The interest earned in the initial principal becomes a part of the principal amount in the compounding year.
Formula for compounding interest over a year.
A= P (1+i) n
A= amount earned i = interest earned
P= Principal n = no. of years

6. Multiple compounding periods:
Interest may be compounded even more than once in a year. The formula is
A= P (1+i/m) m*n
m = no of times in a year
n = no of years

7. Present value of discounting concepts
If the amount that has to be received in future will have less value if it is received today.
Present value after n years
Pv = A /(1+i) n
Pv = Principal amount
A = amount
i = Interest rate
n = no of years

8. Present value of series of cash flows