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Q.1 What are some of the assumptions behind the TVM calculations? How do these assumptions limit our application of these calculations?
Q.2 write a reply for this article
Some of the basic assumptions behind the TVM is that, a dollar today is worth more than a dollar in the future.
TVM presume five variables namely, present value PV, Future value FV, number of period, interest rate and payments.
The assumptions behind the TVM follow that,
-Money is always productive and repeatedly invested
- Short term interest rate are similar to line to long term interest rate, implying that the yield curve is flat
-Payment made are always equal can be classified all inflows or outflows
-The interest rate is stable throughout the time period
Limitation of the application of TVM
-We cannot always predict the future and be accurate about our forecasts in cashflows
-Many external factors can play spoilsport be it economic and political factors
-Citations of default risk where the lender may not be able to pay back to us