Sign Up Now
Get instant access to over 1 million+ study documents
OR
Already registered? click here to login
By creating your account, you agree to our terms of service, privacy policy and student honor code.
Future Value
The time value of money is a financial concept that relates to the earning power of money. When money is held over a period of time, it can be invested so that the value of that money grows. This can be interest earned in a bank account, or earnings from investments. Similarly, the value of money that is not earning will erode over time, because of inflation that weakens the purchasing power of money. Thus, financial managers will take these factors into account when calculating cash flows -- money in the future is not worth as much as money today (Investopedia, 2013).
The time value of money therefore reflects two key variables -- time and interest. The interest or discount rate is the prevailing rate of interest in the economy, or for the company. This combines with time to increase or decrease the value of money. For financial managers and for those who are studying finance, it is essential to understand how these two variables affect the value of money.
It is critical for financial managers to understand the time value of money for a few reasons. The central concept is purchasing power, and the idea that a dollar in the future will buy less than a dollar today -- or a pound, or a euro, wherever the manager works. When working with clients, the manager operates based on the idea that their money will be used to purchase goods and services, and therefore the manager's job is to preserve or improve the purchasing power of the money, rather than its nominal value. Financial managers...
This is done with things like retirement planning, where future cash flows need to be understood in terms of their purchasing power. This is also done at the corporate level, where a company makes an investment today and wants to know the value in today's dollars of the expected cash flows that they will receive in the future.
If the financial manager does not take into account the time value of money, it will be much more difficult for anybody to understand the figures that are presented. Consider for example in retirement planning. The customer will receive figures from the financial manager about how many dollars that person will be able to spend annually in retirement. What will not be easy to understand is what one might be able to purchase in the future for those amounts. The financial manager needs to use a discount rate -- probably in this case based on inflation -- in order to fully illustrate what the client's expected lifestyle in retirement will be. Incorporating the time value of money into the analysis will allow both the manager and the client to have the necessary context to make better decisions. Time value is therefore a critical component of the financial analysis.
Merritt (2013) notes that businesses also use the concept of time value of money to make investment decisions. Where businesses want to maximize their return on investment, they need to have a strong understanding of what money…
Works Cited:
Brealey, R.A., Myers, S.C., & Allen, F. (2005). Principles of corporate finance, 8th Edition. The McGraw Hill. Retrieved May 2012 from http://jcooney.ba.ttu.edu/fin3322/Brealey%20Files/Appendix%20A%20-%20Present%20Value%20Tables.pdf
Investopedia. (2013). Definition -- Time value of money. Investopedia. Retrieved September 12, 2013 from http://www.investopedia.com/terms/t/timevalueofmoney.asp
Merritt, C. (2013). Why is the time value of money so important in capital budgeting decisions? Houston Chronicle. Retrieved September 12, 2013 from http://smallbusiness.chron.com/time-value-money-important-capital-budgeting-decisions-61898.html
Project Management (Business) Return on Investment is applicable to decision making by the management by making use of projected proceeds in addition to the time value of money. The weighed up total cost of the project over the five-year time period of its life cycle $20 million. The intent of the organization is the plan to borrow this full amount and from then on recompense the debt every year in 5-year
The value of a Certificate of Deposit (CD or GIC) with a fixed term will be determined assuming it is reinvested at its maturity." 3. Financial implications of TVM Based on approximate calculi of future values of the money, the population will regulate their investments in order to achieve significant profits. Their actions will have numerous influences upon various work domains and industries suck as banking, insurance industry, governmental actions or
Future of Managed Care Medical facilities have become much more important today than they were ever before. The complex diseases are treated by treatment methodologies and the equipment that were nonexistent a few decades ago. But these facilities have also increased in the cost of treatment. The medical facilities thus need to find ways in which a patient can be offered services without over-burdening him. The financial and economic situation of
Time Management At ResCare Inc. The time consumed between the auditing processes and conducting training is substantial. This time could be used more efficiently and there are opportunities to reduce the time frame between those two processes. There are methods that can be used to manage and reduce this time which fall under the realm of time managing process. Time management is processes of planning, creating awareness, and harnessing control over
85). Newly independent countries joined in the shipping industry as a way of demonstrating their economic independence, leading to an increase in the number of open registers as owners in the traditional maritime countries could now register in countries with less demanding tax laws and lower costs for workers. Shipbuilding, which had long been dominated by Europe and North America, moved instead to East Asia. Other changes also took place
value of money reflects the fact that money diminishes in value over time. A dollar today has more buying power than a dollar tomorrow does. The time value of money holds under conditions where there is inflation. As the price of goods and services rises over time, the purchasing power of a dollar diminishes over time. The time value of money concept in finance reflects this reality by translating