Individuals commonly prefer possession of cash immediately or in the present moment quite than the same amount at any time in the future. Such time preference is fundamentally due to the subsequent reasons:
(a) Uncertainty of cash flows
(b) Preference for current consumption
(c) Availability of investment opportunities.
In matter of an investor opts to obtain cash in future she/he would demand a risk premium over and above the risk free rate when compensation for time to account for the improbability of cash flows. Discounting and compounding are techniques to support the comparison of cash flows going on at various time periods. In compounding future value of cash flows at a specified interest rate at the end of a specified period of time are cash flows at a specified interest rate at the starting of a specified period of time are determined. An annuity is a series of periodic cash flows of equivalent amount. Perpetuity is an annuity of infinite duration.