Question

What are some of the assumptions behind the TVM calculations? How do these assumptions limit our application of these calculations?

Answer 1

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Answer:

Some of the basic assumptions behind the Time Value of Money calculations is that, a dollar today is worth more than a dollar in the future. TVM presumes five variables namely, Present value (PV), future value (FV), number of periods (N), interest rate (r), and payments (PMT). The assumptions behind the TVM follow that 5 Money is always productive and repeatedly invested for returns can be re- invested >> short term interest rates are similar in lines to long term interest rates, implying that the yield curve is flat > Payments made (PMT) are always equal can be classified all inflows or all outflows The interest rate (r) is stable throughout the time period. Limitations of the application of Time Value of Money >> We cannot always predict the future and be accurate about our forecasts in Cashflows. > Many external factors can play spoilsport be it economic and (or) political factors. -> Citations of default risk where the lender may not be able to pay back to us.