in 1st Q, investment would be done at some future time(i.e. at the end of each year), so we have to calculate future value. but in 2nd, inv. would be made at present.
Satvir Singh
(Newly minted CA)
(1733 Points)
Replied 20 September 2010
in 1st Q, investment would be done at some future time(i.e. at the end of each year), so we have to calculate future value. but in 2nd, inv. would be made at present.
Ankit
(ca final)
(287 Points)
Replied 20 September 2010
P.VIJAYKUMAR
(DY.MANAGER ACCOUNTS)
(79 Points)
Replied 22 September 2010
Hello,
To put it very simply
1. If you want to know what will be the value of some amount of money (say RS.5000) which you have today ,after a specified future period(say after 5 years) then you use future value formula or the annuity rate to calculate the future value of the amount. The formula is (1+r)power n. where" r' is the capitalisation rate given in the problem or cost of capital and "n" is the number of years.
=Rs.5000*(1+r)power n and if r=10% and n=5 then
=Rs.5000*(1+0.10)power 5
2.Suppose you have Rs.5000 after 5 years and you want to calculate what value it will be at the present date then you will you the present value formula or the discount rate.The formula is 1/(1+r)power n.
=Rs.5000*1/(1+r)power n
=Rs.5000*1/(1+0.10) power 5
Hope you understand now.if not please contact me again.
Regards,
Vijaykumar
radhika rawat
(student)
(93 Points)
Replied 23 September 2010
sometimes the cash flows of same amount is received for no. of years example premium payments of a life insurance policy this is future value of an annuity
"Live class on Python for Financial Analysis: Unlocking Efficiency in Accounting and Finance"
CAclubindia
