FINANCE

Time Value of Money



Time Value of Money

Introduction

Money has a time value. It means that if a person has a dollar in possession is preferred over a dollar that person is expecting to receive at some point of time in the future. If the dollar is postponed, it means that the consumption is also postponed. As a result, a person must have significant return in order to convince that person to delay his or her consumption today to utilize more in the future. It is done through getting a return over time, which is two forms, either interest or a capital gain. It means that the dollar, which will be invested will grow to an increased amount in the future because of return on it. In other words, it can be said that the dollar amount that will be paid or received in the future is worth less today (studyfinance.com). This is because the smaller amount today could be invested and would grow to the greater amount in the future.

In this essay, we will be discussing the calculations of present and future values with the help of formula of time value of money. In addition, we will be discussing the importance of studying present value in corporate finance class before studying other topics. In conclusion, we will be summarizing by stating the significance of the module and overall summary of the essay.

Discussion

The time value of money reflects the relationship between time, financial flows and interest rates. All things being equal, a person may prefer to hold a certain amount of money on checking account at that moment, than to receive the same amount at a future date. To concede, however, that to put the money available to such a company B, for a given time, it will have to pay in addition to reimbursement of the amount the person had paid the agreed term, compensation.

1) Importance of the Concept of Present Value

The concept of present value is essential for the purpose of taking an investment decision. The concept is taught in any finance class before other concepts because of the fact that a company can face losses if it does not calculate the current level of its investment before taking an investment decision. That is why; an investor must know the value of its investment today and in future to hold the investment position intelligently.

The current worth of a ...