Question

Define and discuss the importance of the time value of money concepts, including compounding (future value), discounting (present value), and annuities. Why would you as an organization leader need to understand these concepts?

Answer 1

Time value of money concept states that dollar value today is more than dollar value later because of potential earning capability of dollar today. if you have one dollar today then you deposit in bank and earn interest on depoait.

time value of money certain term such as:

Compounding

Compounding is term use tto calculate future value of present value using interest rate.if present value is $100 and interest rate is 10% then value after one year will be $110. the procedure of calculation of future value is called compounding.

Discounting

Discounting is term use tto calculate present value of future value using interest rate.if future value after one year is $100 and interest rate is 10% thenpresent value is $90.90. the procedure of calculation of future value is called Discounting.

Annuities

Annuities are defined as series of equal payment for fixed period of time. Aloan repayment of equal amount for limited period is an example of annuities.