In project analysis, as well as in other areas of economic knowledge use of the concept of "time value of money", meaning that 1 soum obtained before, is worth more than 1 soum received after, and there are 3 reasons: - In project analysis, as well as in other areas of economic knowledge use of the concept of "time value of money", meaning that 1 soum obtained before, is worth more than 1 soum received after, and there are 3 reasons:
- - Inflation;
- - The possibility of investing money at interest;
- - The risk.
- For this purpose, discounting - the process of bringing the cash flows to a common point in time.
The process by which an initial amount of investment and the interest rate income from them, in financial calculations called compounding process.
In financial practice common with the task of reverse compounding process: the organization plans will get after some time t the amount of FV and it must determine the amount of funds invested under the PV with given interest rate. In these cases we say that the sum of FV discounted.
In this process deducted interest called as discount.
Present
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Processes
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Future
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The initial amount
Interest rate
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Compounding
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Future value
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Present value
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Discounting
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Future value
Discounts rate
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FV = PV (1+k)n
Task # 1. The company needs to choose the most effective way of investing for 10 years.
The first is the company may sell the supermarket for 500 thousand US $ and put money to the bank deposit at 15% per annum. The company may lease the supermarket for 10 years and receive annual net rental income 195 thousand US $.
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