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TIME VALUE OF MONEY - TIME VALUE OF MONEY INTRODUCTION...

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TIME VALUE OF MONEY
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INTRODUCTION Firms are always confronted with opportunities to earn positive rates of return on their funds, either through investment an attractive project or in interest bearing securities or deposits. Therefore, the timing of cash flows has important economic consequences, which financial managers explicitly recognize as the time value of money. Time value is based on the belief that a
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FUTURE VALUE (COMPOUNDING): This is the value of a present amount at a future date, found by applying compound interest over a specific period of time. The process of computing future values is referred to as compounding. FV = PV (1 + i)n EXAMPLE: Suppose you deposited Sh 100,000 in a bank account that pays 8% interest each
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When compounding is done more frequently than annually i.e. semi-annually quarterly or monthly, the formula can be re-written as: FV = PV (1 + i/m)mn Where m is the number compounding periods or the number of times compounding is done in a year.
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PRESENT VALUE
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