time value of money and its compounding and discounting technique, their explanation and formulas and difference with difference chart. and examples.

1. Time value of
money:
compounding
and
discounting
techniques
• By-
• Muskan Verma
• BBA SEM IV
• 02115101718

2. Time value of money
• The time value of money (TVM) is the concept that
money you have now is worth more than the
identical sum in the future due to its
potential earning capacity. This core principle of
finance holds that provided money can earn
interest, any amount of money is worth more the
sooner it is received. TVM is also sometimes
referred to as present discounted value.

3. Time value of money
Time value of money is based on the idea that
people would rather have money today than in the
future.
Given that money can earn compound interest, it
is more valuable in the present rather than the
future.
The formula for computing time value of money
considers the payment now, the future value, the
interest rate, and the time frame.
The number of compounding periods during each
time frame is an important determinant in the
time value of money formula as well

4. Time value of money
formula
• FV = Future value of money
• PV = Present value of money
• i = interest rate
• n = number of compounding
periods per year
• t = number of years

5. COMPOUNDING
TECHNIQUE
• 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.

6. Formula
• 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).

7. Discounting
technique
• Discounting is the process of
determining the present value of a
payment or a stream of payments that is
to be received in the future. Given
the time value of money, a dollar is
worth more today than it would be
worth tomorrow. Discounting is the
primary factor used in pricing a stream of
tomorrow's cash flows.

8. • When a car is on sale for 10% off, it represents a discount to the price of the car. The same
concept of discounting is used to value and price financial assets. For example, the
discounted, or present value, is the value of the bond today. The future value is the value of
the bond at some time in the future. The difference in value between the future and the
present is created by discounting the future back to the present using a discount factor,
which is a function of time and interest rates.

9. How Discounting works
• For example, a bond can have a par value
of $1,000 and be priced at a 20%
discount, which is $800. In other words,
the investor can purchase the bond
today for a discount and receive the full
face value of the bond at maturity. The
difference is the investor's return.
• A larger discount results in a greater
return, which is a function of risk.

10. • Time Value of Money says that the
worth of a unit of money is going to be
changed in future. Put simply, the value
of one rupee today will be decreased in
future. The whole concept is about the
present value and future value of
money.
• Two methods: Compounding method is
used to know the future value of
present money.
Conversely, discounting is a way to
compute the present value of future
money.

11. Difference
chart
BASIS FOR
COMPARISON
COMPOUNDING DISCOUNTING
Meaning The method used to
determine the future
value of present
investment is known as
Compounding.
The method used to
determine the present
value of future cash flows
is known as Discounting.
Concept If we invest some money
today, what will be the
amount we get at a future
date.
What should be the
amount we need to invest
today, to get a specific
amount in future.
Use of Compound interest rate. Discount rate
Known Present Value Future Value
Factor Future Value Factor or
Compounding Factor
Present Value Factor or
Discounting Factor
Formula FV = PV (1 + r)^n PV = FV / (1 + r)^n

12. Thank you