Professional Documents
Culture Documents
I. M. Pandey, Financial Management, 9th Ed., Vikas. 1
I. M. Pandey, Financial Management, 9th Ed., Vikas. 1
I. M. Pandey, Financial Management, 9th Ed., Vikas. 1
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Financial accounting and Financial
Management
Financial accounting gives the
financial status of the company
to people outside the company.
It is recording and reporting the
activities and events that lead to
cash inflow and outflow.
Financial management means
efficiently managing the various
resources of the company.
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Financial accounting and Financial
Management
Certainty
Accounting is maintenance of financial
records. So, it deals with what has already
occurred. This makes it more certain.
A finance manager is concerned with what
is going to happen in the future. He takes
critical decisions that will affect the future
of the company. These are based on
various calculations and assessments. This
is not easy because there are many
uncertainties in financial management.
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Time Value of Money
Time preference for money is
an individual’s preference for
possession of a given amount of
money now, rather than the same
amount at some future time.
Three reasons may be attributed
to the individual’s time preference
for money:
– risk
– preference for consumption
8 – investment opportunities
Future Value
Compounding is the process of finding the
future values of cash flows by applying the
concept of compound 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withdrawn during earlier periods.
Simple interest is the interest that is
calculated only on the original amount
(principal), and thus, no compounding of
interest takes place.
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Example
If you deposited Rs 55,650 in a bank, which
was paying a 15 per cent rate of interest on a
ten-year time deposit, how much would the
deposit grow at the end of ten years?
Fn P(1 i) n
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Present Value
Present value of a future cash flow
(inflow or outflow) is the amount of
current cash that is of equivalent value
to the decision-maker.
Discounting is the process of
determining present value of a series of
future cash flows.
The interest rate used for discounting
cash flows is also called the discount
rate.
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Present Value of a Single Cash
Flow
The following general formula can be
employed to calculate the present value of a
lump sum to be received after some future
periods: Fn
P Fn (1 i )
n
(1 i )
n
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Exercises
What's the present value of:
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What is Capital Budgeting?
Initial Terminal
outlay Cash flow
0 0 11 22 33 4 55 66 .. .. .. nn
0 1 1.6 2 3