MANAGEMENT

Detailed explanation-1: -Compounding. Compounding is the impact of the time value of money (e.g., interest rate) over multiple periods into the future, where the interest is added to the original amount. For example, if you have $1, 000 and invest it at 10 percent per year for 20 years, its value after 20 years is $6, 727.

Detailed explanation-2: -The compounding technique is used to find out the future value of different cash flows occurring at different points of time. According to this technique, interest earned on the initial principal or cash outflow becomes part of the principal for calculating interest for the next period.

Detailed explanation-3: -Compounding is the process whereby interest is credited to an existing principal amount as well as to interest already paid. Compounding thus can be construed as interest on interest-the effect of which is to magnify returns to interest over time, the so-called “miracle of compounding.”

Detailed explanation-4: -Net present value (NPV) provides a simple way to answer these types of financial questions. This calculation compares the money received in the future to an amount of money received today while accounting for time and interest.

Detailed explanation-5: -Compound interest calculations can be used to compute the amount to which an investment will grow in the future. Compound interest is also called future value.