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Basic Financial Management Rohit Bansal, Lovely Professional University

Notes Unit 3: Time Value of Money

CONTENTS

Objectives
Introduction
3.1 Meaning of Time Value of Money
3.2 Valuation Concepts or Techniques
3.3 Compound Value Concept

3.3.1 Multiple Compounding Periods
3.3.2 Future Value of Series of Cash Flows
3.3.3 Compound Sum of an Annuity
3.4 Discounting or Present Value Concept

3.5 Practical Implications of Compounding and Discounting Value Concepts
3.6 Summary
3.7 Keywords
3.8 Self Assessment
3.9 Review Questions

3.10 Further Readings

Objectives

After studying this unit, you will be able to:
Discuss compounding value concept

Describe discounting value concept
Introduction

It has been explained in the preceding unit that Maximization of the shareholder’s wealth is the
basic objective of the ﬁnance manager of a ﬁrm. This requires him to take appropriate decisions

on ﬁnancing, investment and dividends. While taking these decisions, the ﬁnance manager must

keep the “Time factor” in mind.
Example:
1. When interest on funds raised will have to be paid.
2. When return on investment will be received.
3. Whether it will be received on a consistent basis or otherwise etc.

All this requires that the ﬁnance manager knows about the various valuation concepts, viz.,
Compound Value Concept, Annuity Concept, Present Value Concept etc. All these concepts are
basically based upon the fact that, money has time value.

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