TIME VALUE OF MONEY Homework Help

TIME VALUE OF MONEY

INTRODUCTION

The object of this Chapter is,to illustrate the basics of the mathematics of finance, that the value of money. Recognition of the time value of money in financial decision making is extremely important. It is observed in Chapter 1 wealth maximization, as an objective of financial management. is superior to profit maximization caucus. among other things, the former incorporates tilt."tuning of received while tilt."latter ignore..-s it. Given the objective of wealth organisational, much of the subject-matter of financial management is future-memorized. A financial decision taken today has circumlocutions for 'a number it prelude, into the future, for example, firms have to acquire fixed for which tallowy pay a main Suitor to the vendors. The benefits arising out of the acquisition of. such assets will be spread over a numeral , of years in the future, till the working life of the a sets. On the other hand. funds have to be procured from different sources such as raising of capital through new issues, bank borrowings, term loans from financial institutions, sale of debentures and so on, These involve a cash inflow at the time of raising funds as well as an obligation to pay interest-dividend and return the principal in future, It is on the basis of a comparison of the cash outflows (outlays) and the benefits (cash inflows) that financial decisions are made, For a meaningful comparison, the two variables must be strictly comparable, One basic requirement of comparability is the incorporation of the time Lerner in 'he calculations, In other words, in order to have and meaningful comparison between cash flows that accrue in rental time periods, it is cranberry to convert the sums of money to a common point of time, This chapter is devoted to a discussion of the techniques for doing so, Section I explains the meaning of, lancet rationale underlying, the time value of money, The technique employed in adjusting the timing aspect of financial decision making through compounding and discounting is explained in Section 2, The important applications of these techniques are demonstrated in Section 3, The effective rates or interest and discount, nominal rates of interest and discount, present value of annuity payable for the period less than a year (PITHILY), loan repayment schedule and effective flat r.Incs of interest arc discussed in Appetite 2-A. Finally, the main points are recapitulated in the summary Section,

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