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Time Value Of Money in Farm Management Compounding DISCOUNTING - ICAR Ecourse PDF at E Krishi Shiksha


In this article we are going to study about Time Value Of Money in Farm Management Compounding discounting methods - A farm manager has to take decisions over varying horizons of time. Two aspects of such decisions are important, i.e., i) differences in profitability growing out of time alone and ii) differences in the desirability of investments due to risk and uncertainty factors. Time has a very significant influence on costs and returns. There are many decisions where this time comparison principle finds application, such as: soil conservation programmes which bear fruits over a long time; putting land under an orchard which may not give returns for 5-10 years; and so on. Two aspects of the problem are considered under such situations: a) growth of a cash outlay over time and b) discounting of future income.

Growth of a Cash Outlay or Compounding Present Costs ( Time Value Of Money )

The cash outlay grows over time due to the compounding of interest charges or opportunity costs involved in using the capital; if Rs.100 are put in a saving account with an annual interest at 12 per cent compounded, it will increase to Rs.125.44 by the end of second year. In symbolic terms, you now have the amount earned at the end of the first year. P + Pi, plus the interest that amount earned during the second year (P + Pi) i which could be expressed as:   (P + Pi) + (P + Pi) i  (or) P (1 + i) + Pi (1 + i) which after factorising (1 + i), results in (P + Pi) (1 + i).  Factorising P from the left term gives: P (1 + i) (1 + i) = P (1 + i)2. In general, the compounded value, F (future value), of a present sum (P) invested at an annual interest rate (i) for ‘n’ years is given by F = P (1 + i)n .This procedure is called compounding.
Compounding the Present Value 

(Amount in Rs.)

Year
Beginning Amount
Interest Earned by the End of Year
Beginning Amount + Interest
1
100.00
100.00(0.12)=12.00
112.00
2
112.00
112.00(0.12)=13.44
125.44
3
125.44
125.44(0.12)=15.05
140.49
4
140.49
140.49(0.12)=16.86
157.35
5
157.35
157.35(0.12)=18.88
176.23

Discounting Future Revenues:

Costs incurred at one point of time cannot be compared with validity to revenues forthcoming at a later date. The future value of the present sum is estimated through: F = P(1 + i)n .Dividing both sides of this equation by (1 + i)n, the following equation is obtained:

Thus, if a pay-off, F, is due in ‘n’ years in future, its present value, P, can be determined using the above expression where ‘i’ is the interest rate. This procedure is known as discounting future returns. The present value of Rs.176.23 that could be at the end of 5 years if the appropriate discount rate is 12 per cent, is:
Discounting can be used to determine the present value of the future income stream earned by a durable input (asset).

Year
Value at the End of the Year 
(Rs)
Present Value, if Discount Rate is 12 Per Cent per Annum (Rs)
1
100
89.29
2
100
79.72
3
100
71.18
4
100
63.55
5
100
56.74
Total
500
360.48
The interest rate used to discount or compound sums of money should be at least as large as the current or market rate of interest. How much higher it might be depends upon the manager’s opportunity costs. The important variables determining present and future values of a single payment or series of payments are: i) the number of years and ii) size of interest rate. Both factors interact to determine the total effects of discounting or compounding on present or future values.

Time Value Of Money in Farm Management Compounding DISCOUNTING - ICAR Ecourse PDF at E Krishi Shiksha compounding and discounting problems compounding and discounting examples compound discount sample problems compounding and discounting ppt time value of money pdf discounting techniques of time value of money compounding and discounting questions what do you understand by compounding technique

Q.1 What is time value of money with example?
Ans.1
The Time Value of Money concept indicates that money earned today will be more than its intrinsic value in the near future. This is due to the potential earning capacity of the given amount of moneyTime Value of Money (TVM) is also referred to asPresent Discounted value.

Q.2 How do you calculate time value of money?
Ans.2
Time Value of Money Formula
  1. FV = the future value of money.
  2. PV = the present value.
  3. i = the interest rate or other return that can be earned on the money.
  4. t = the number of years to take into consideration.
  5. n = the number of compounding periods of interest per year.

Q.3 Why does money have a time value?
Ans.3
The time value of money (TVM) is the concept that money available at the present time is worth more than the identical sum in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.

Q.4 What are the objectives of time value of money?
Ans.4
Objectives of Time Value of Money. Time value of money concept is the part of financial education and awareness. Its objective is to teach the value of money which will increasing only due to spending of money.

Q.5 What are the reasons for time value of money?
Ans.5
There are three basic reasons to support the TVM theory. First, a dollar can be invested and earn interest over time, giving it potential earning power. Also, moneyis subject to inflation, eating away at the spending power of the currency over time, making it worth a lesser amount in the future.

Q.6 How do I calculate present value?
Ans.6
The present value of receiving $5,000 at the end of three years when the interest rate is compounded quarterly, requires that (n) and (i) be stated in quarters. Use the PV of 1 Table to find the (rounded) present value figure at the intersection of n = 12 (3 years x 4 quarters) and i = 2% (8% per year ÷ 4 quarters).

Q.7 Does NPV take into account the time value of money?
Ans.7
Net present value (NPV) is the difference between the present value of cashinflows and the present value of cash outflows over a period of timeNPV is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project.

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