Time Value of Money

Answer# 1

The concept of time value money is of integral importance in the domain of financial management. The concept shoulders the process of decision making while investing some money for the future benefit. The underline concept of Time Value of Money defines the idea that:

"A Dollar today has more worth than a dollar tomorrow"

A dollar today is worth more than a dollar after year. The main idea is that the money that is available now will worth more in the future due to the possible earning capacity. The principle which holds this concept is the interest that is earn on the invested amount (Smal C., 2001).

Time value of money is a concept which is important for making a decision which had a great impact on this has a great impact on the decision making of the financial managers of the organization. Because they are responsible for the taking the investment decisions and they need to save the time value of money and also needs to put the excess amount of money beyond time value of money, that in terms of time value they need to earn greater than the discounted rate. In that way they will yield a profitable position for the organization.

There are certain factors which impacts and governs the concept for example: Interest, Inflation and value of money. For example:

Mr. A has $ 5 today and he placed it in 2 % interest saving account which would annually generate 2 cents in interest a year, then this total (1.02 dollar) will generate an interest of 5.10 cents the following year, and this total (1 + 0.02 + 0.0525) will generate an interest of 5.25 cents the year after, etc. In the same way that one dollar is worth more today than tomorrow dollar.

The value of money and the concept of fruit basket are also important here. For instance, assume 10 % interest rate; $ 100 invested today will be worth $ 110 in one year i.e. $ 1000 multiplied by 1.1. On the other hand, one year from now $ 1000 will be received which is value $ 95.24 today ($ 100 divided by 1.1). Through time value of money, one can calculate the following four values:

-Future Value- (FV) of a Dollar calculation.

-Present Value- (PV) of a Dollar calculation.

-Future Value - (FV) of an Annuity. 

-Present Value- (PV) of an Annuity.

Answer# 2

It is mandatory for a financial manager to understand the in-depth knowledge as well as the practical implementation of the concept of time value of money. The reason why Financial pundits and financial gurus emphasize on this concept is because it helps and supports financial manager of a firm in investing for the future benefit. Here a decision is worth more than a concept. A financial company has the investor's money with them and they need to invest this money in order to earn maximum interest /profit a very minimum exposure to risk. Here the timing of decision is also the most integral ...