The concept that money has time value is one of the most fundamental notions of investment analysis. For any type of productive asset its value will based on the future cash flows related with that specific asset. So as to assess the adequacy of cash flows one of the significant parameters is to assess the time value of the cash flows that are: Rs.100 acquired after one year would not be similar as Rs.100 received after two years. There are numerous reasons to account for this dissimilarity based upon the timing of the cash flows, several of that are as given below:
- there is a common preference for present consumption to future consumption,
- capital or savings can be employed to produce positive returns,
- because of inflation purchasing power of money decreases over time,
- Future cash flows are unsure.
Translating the present value of money into its equal future value is considered as compounding. Translating a future value or cash flow in its equivalent value in a prior era is considered to as discounting. This section deals with fundamental mathematical techniques used in discounting and compounding.