BLOCK 3 UNIT – 2 TIME VALUE OF MONEY Q1.

What are the reasons which accounts for the difference based on the timing of the cash flows? Ans: The reasons to account for the difference on the timing of the cash flows are given below: • There is a general preference for current consumption to future consumption. • Capital or savings can be employed to generate positive returns. • Due to inflation purchasing power of money decrease over time. • Future cash flows are uncertain. Q2. What is the difference between compounding and discounting? Ans: Translating the current value of money into its equivalent future value is referred to as compounding. Translating a future cash flow or value into its equivalent value in prior period is referred to as discounting. Q3. Give the equation for calculating the future value? Ans: The future value of amount after n periods is PV = PV(1+k)n where FV = Future Value, PV = Present Value, k = Interest rate per year in percentage and n = number of years for which compounding is done.