- What are some possible financial decisions in which using the
Future Value (FV) formula might be helpful?
The concept of time value of money states that the money received today is worth more than that the same amount of money receivable at a future date. The value of a certain amount of money today is more valuable than its value tomorrow. The difference between the value at 'Present' and its value at 'Future' is referred to as Time Value of Money.
For ascertaining the time value of money, two basic valuation techniques are used i.e. Compounding or Future value technique and discounting or Present value technique.
1.Discounting or Present value technique: Discounting is the process of determining the present value of the money which is likely to be received in future.
2.Compounding or Future value technique: The theory of compounding facilitates in ascertaining the Future value(FV) of today's money. It is similar to the concept of Compound Interest which follows that re-investment of the principal amount alongwith the interest earned during the previous year at the certain rate of interest. The total amount (principal+interest) at the end of current year will be the principal amount for the next year.
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