Financing and Marketing Management

Unit 4- Fishery Financial Management

4.5. Time value of Money
A rupee on hand today is more worth than a prospect of receiving a rupee at some future time. The strong preference for current receipts over future receipts is explained three factors namely, uncertainty, alternative uses for money and inflation. The time value of money can be known through the processes of compounding and discounting.
Compounding
The process of finding the future of a present sum is called compounding. This is sometimes also called as growth in cash outlay. The formula for this is

FV = P0 * (1+i)^n

Where FV = Future value of present investment
P0 = Present investment
i = interest rate or opportunity cost
n = number of year for which the present investment is allowed to grow
Discounting

PV= (1+i)-^n*Pn

The process of finding the present value of a future payment is called discounting. The future value must be discounted to reflect the present value in terms of today’s purchasing power or earnings lost by an individual by not being able to immediately invest the future sum in alternative investments.