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- Additional compensation required for parting with say Rs.1,000 now is called 'interest'.
- There are two methods by which the time values (FV) of all the cash flows at the end of the time horizon at a particular rate of interest.
- Under the method of discounting, we reckon the time value of money now i.e., at time zero on the time line. So, we will be comparing the initial outflow with the sum of the present values (PV) of the future inflows at a given rate of interest.
- To determine the accumulation of multiple flows as the end of a specified time horizon, we have to find out the accumulations of each of these flows using the appropriate FVIF and sum up these accumulations.
- Annuity is the term used to describe a series of periodic flows of equal amounts.
- To determine the present value, we have to first define the relevant rate of interest.