Time Value of Money, a Financial Management Concept

Topics: Time, Time value of money, Finance Pages: 1 (313 words) Published: December 11, 2012
Money is an essential part of everyday existence and in order to understand and handle money matters, financial managers must understand how factors such as time and discount interest rates affect value. Money has a time value associated with it and therefore, a dollar today is worth more than a dollar in the future (Block & Hirt, 2005). Today money can be invested to earn interest to create more cash later or decrease the value over time. This paper will explain various financial applications of the time value of money (TVM), and will explain the components of a discount interest rate. Time Value of Money

The time value of money (TVM) is a financial management concept used in comparing investment alternatives, which facilitates problem solving with regard to loans, mortgages, leases, savings and annuities. TMV has two specific components, future value and present value. Each component can aid an investor in deciding whether to borrow money, buy a house, rent office space, save money or purchase an annuity. In addition to the primary components of future value and present value, TVM has other components such as interest (simple and compound) number of period (years) and payments. Future value (FV) is determined by measuring the value of a face value amount that grows at certain percentage rate over a period of time. The formula for calculating future value is: FV=PV(1 + i)- using Block and Hirt’s (2005) example on page 240, chapter 9 the following would be true: An investor has $1000 and wants to know what that $1000 will be worth over the course of four years at an interest rate of 10% annually. The future value would be determined accordingly- 1st year $1,000 * 1.10= $1,100

2nd year $1,100*1.10=$1,210
3rd year $1,210 *1.10=$1,331
4th year$1,331 * 1.10=$1,464
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