Rajyavardhan has a 10-year-old son who is very inquisitive about money. Wanting to test his son’s savviness, he showed his son a Rs 2000 note and gave him a choice: his son could either opt to take the note immediately; or, he could take it after a month. His son promptly chose the first option.

Investors are familiar with this choice—money in the hand is worth more than the same money available in the future. This is due to the uncertainty the future presents. More importantly, money has the power to earn over time. So it becomes more valuable if available earlier in time.

In the above example, the Rs 2000 if available today can earn interest for one month, leaving you with more money in hand than if the same Rs 2000 were to be available one month into the future. This is called ‘compounding’.

Let us see what happens when the process is reversed.


Read the full article published originally on Financial ExpressHow to use Net Present Value to determine your investments