time value money

Topics: Time, Time value of money, Money Pages: 4 (1053 words) Published: November 8, 2013


Running head: STRATEGIC CORPORATE FINANCE

STRATEGIC CORPORATE FINANCE

TIME VALUE OF MONEY

The aim of this paper is to learn about time-value-of-money to make optimal decisions as manger must understand the relationship between a dollars present today and a dollar in the future.

Time value of money
Today’s financial managers often have to compare cash payments that occur on different dates. To make optimal decisions, the manager must understand the relationship between a dollar today [present value] and a dollar in the future [future value]. The time value of money is basically a measurement or perspective of an investment you might make while still considering its future decrease in value due to inflation. The time value of money allows us to understand what that inflation or decrease may become in the future or present. Most importantly, the time value of money concept allows us to decide whether it would be beneficial placing a sum of money into investment where it collects value from interest, or whether that same amount of money would be most valuable in the present due to inflation rates.

Understanding the concept of time value of money
It is very important for managers to understand the concept of time value of money because it reminds them that any amount of money is worth more when it is

STRATEGIC CORPORATE FINANCE

received sooner rather than later. Therefore, certain decisions need to be made based on the company’s needs and capabilities. Managers have to keep in mind that a particular amount of money considered today has a different buying power than that same amount of money would have in the future. The value of that money changes due to two factors: earned interest and inflation (Study finance, 2013, Par. 1). These are both considered when organizations make decisions concerning the time value of money.

Prior to making decisions, measurements must be made including determining the...
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