Time Value Of Money

1656 Words4 Pages
bulb-icon

Recommended: Factor of time value of money

Time Value of Money

Time Value of Money

To make itself as valuable as possible to stock holders; an enterprise must choose the best combination of decisions on investment, financing and dividends. In any economy in which firms have the time preference, the time value of money is an important concept. Stockholders will pay more for an investment that promises returns over years 1 to 5 than they will pay for an investment that promises identical returns for years 6 through 10. Essentially one must determine if future benefits are sufficiently large to justify current outlays. The development of mathematical tools of the time value of money is important as the first step towards making capital allocating decisions (Malawi, 2008).

Financial Applications of Time Value of Money

The time value of money is essentially saying that today’s dollar is worth more than if I would get the same amount at a later date. Whenever one decides to allocate capital, make purchases of new plant and equipment or introduce a new product one must determine if the projected future benefits are sufficiently large to justify the current outlay.

The concept discussed above has many applications for a given interest rate calculating the future value of an amount compounded over a period of years, present value of an amount discounted over a period of years, future value of annuity, present value of annuity and how mortgage amortization is calculated.

Applications include retirement plan choices, capital investment strategies such as buy versus lease decisions and personal choices concerning annuities to name a few. The choices concerning retirement and how to save are relatively simple and can be evaluated using two of the time value concepts and equa...

... middle of paper ...

...87. Retrieved from the University of Phoenix EBSCOHost database on March 13, 2008

Investopedia ULC. (2008). Future Value (FV). Retrieved March 14, 2008, from http://www.investopedia.com/terms/f/futurevalue.asp

Leinberger, C., (2001). Financing progressive development. Retrieved March 13, 2008, from http://www.brookings.edu/articles/2001/05metropolitanpolicyleinberger.aspx.

Malawi College of Accounting. (2008). Time value of money. Retried March 7, 2008 from http://cbdd.wsu.edu/kewlcontent/cdoutput/TOM505/page33.htm.

Olu-Tima, T. (2003). Acceptable Project Investment Criteria. AACE International Transactions, Retrieved March 17, 2008, from Business Source Complete database.

Roley, V., & Sellon, G. (1995). Monetary policy actions and long-term interest rates. Economic Review (01612387), 80(4), 73. Retrieved March 16, 2008, from Academic Search Premier database.

Show More
Related

  • The Financial Crisis of 2007-2008 and The Federal Reserve

    2612 Words  | 6 Pages

    Some economists blame the Federal Reserve’s inaccurate monetary policy. The easy-monetary policy since 2001 was deviating from the Taylor rule. (Alex, 2013)

    Read More

  • value

    1823 Words  | 4 Pages

    Earlier 2002, the stock price of Agnico-Eagle Mines sharply decreased by $1 finally closed at $13.89. This price has reached one of the lowest level, from the company's historical perspective. As a professional equity portfolio manager, who has a large number of AEM stocks on hand. Acker and his team are necessary to find a proper way to estimated the fair value of AEM as well as its equity. Discounted Cash Flow (DCF) has been chosen to do this job. The theory behind DCF valuation approach is that the firm's value can be estimated by using the expected future free cash flow discounted by an appropriate discounted rate (Koller etc 2005). However several assumptions need to be clearly examined within this approach. The following sections are showing the process of DCF step by step.

    Read More

  • Dupont Case

    1919 Words  | 4 Pages

    We defined several criteria to determine our choice – return, risks and other quantitative and qualitative factors. Targeting a debt ratio of 40% will maximize the firm’s value. A higher earning’s per share and dividends per share will lead to a higher stock price in the future. Due to leveraging, return on equity is higher because debt is the major source of financing capital expenditures. To maintain the 40% debt ratio, no equity issues will be declared until 1985. DuPont will be financing the needed funds by debt. For 1986 onwards, minimum equity funds will be issued. It will be timed to take advantage of favorable market condition. The rest of the financing required will be acquired by issuing debt.

    Read More

  • The Purpose of the Federal Reserve System

    2699 Words  | 6 Pages

    Metzler, Allan H. A History of the Federal Reserve, Vol I and II. University Press Books, 2002

    Read More

  • Analysis Of Rebecca Young's Decision To Buying A Condominium

    864 Words  | 2 Pages

    Rebecca Young has finished taking her Master of Business Administration and decided to move to Toronto in May 2013. She moves to a new place to follow her desire on finding a new job in investment banking. She rents a spacious condominium with two bedrooms in it with the rents of $ 3,000 per month. In July 2014, the same condominium unit next to her condominium are decided to be sold. Young believed that she could afford the condominium for $ 600,000. However, she felt that she bought a condominium that will not meet her long-term needs. Thus, Young decided to sell it in two to ten years. Analysis of Young's decision to buy or rent a condominium from the quantitative side is the suitable way to get the best financial decisions.

    Read More

  • TVM

    591 Words  | 2 Pages

    Time value of money (TVM) is a monetary concept that is very important to all parts of the financial world. This concept basically says that $100 today is worth more than $100 a year from now (or anytime in the future). Also, an individual should earn some value of compensation for not spending their money. This compensation is essentially called the interest that will be earned on the initial cash. What about when an individual opts to receive money in the future rather than today? That can lead to problems. This is because they are taking a gamble by loaning money- since there is almost always risk in loaning money. A couple of these risks include inflation and default risk. Default risk means that the person who borrowed the money does not repay the money to the person that loaned it. Inflation means that the general prices of products will rise. How does all this work? In theory the person that gets the $100 today could invest it, even at a very low annual percentage rate (APR), and still come out ahead. If they invest it at 2% APR, they would have $102 at the end of one year. Th...

    Read More

  • More Powerful than the Government? A Review of the Federal Reserve

    1938 Words  | 4 Pages

    Meltzer, Allan. Learning about Policy from Federal Reserve History. Rep. Social Science Research Network, 04 Feb.

    Read More

  • CPV Analysis Of Lululemon

    1413 Words  | 3 Pages

    Making an investment towards a new project/product/company is hardly a simple process. Numerous factors including costs, benefits, time, and resources need to be taken into account before a decision to pursue a new project should be ventured into. At the end of the day prioritising projects and investing funds into projects that have the most potential towards favourable return on investment should be considered. Investment appraisal should not only be used for projects with a monetary return, it is also pertinent to use the tools where the return may not be easy to quantify such as training or development programs. Investment

    Read More

  • Current Monetary Policy Of The United States

    2057 Words  | 5 Pages

    Labonte, M. (January 7, 2014). Monetary Policy and the Federal Reserve; Current Policy and Conditions. Congressional Research Service.

    Read More

  • The Federal Reserve System

    2337 Words  | 5 Pages

    Author Unknown (1994). The Federal Reserve System: Purposes and Functions (5th ed.) Published by Library of Congress

    Read More

  • Exhange Risk Faced by Multinational Corporations (MNCs)

    1553 Words  | 4 Pages

    Brealey, Richard A., Marcus, Alan J., Myers, Stewart C. 1999, Fundamentals of Corporate Finance, 2nd edn, Craig S. Beytien, USA.

    Read More

  • The Importance of Proper Asset Allocation

    1614 Words  | 4 Pages

    Hensel, C. R., Ezra, D., & Ilkiw, J. H. (1991). The Importance of the Asset Allocation Decision.

    Read More

  • The Theoretical Rationale For The NPV Approach To Investment Appraisal

    1388 Words  | 3 Pages

    One of the key areas of long-term decision-making that firms must tackle is that of investment - the need to commit funds by purchasing land, buildings, machinery, etc., in anticipation of being able to earn an income greater than the funds committed. In order to handle these decisions, firms have to make an assessment of the size of the outflows and inflows of funds, the lifespan of the investment, the degree of risk attached and the cost of obtaining funds.

    Read More

  • Time Value Of Money

    1709 Words  | 4 Pages

    One might know that time is one of the most valuable assets in our lives. In the financial world the value of money is linked to time, primarily because investors expect progressive returns on their cash over periods of time, and they always compare the return from certain investments with the going or average returns in the market. Inflation on other hand erodes the purchasing power of money causing future value of one dollar to be less than the present value of a dollar. This paper will examine time value of money and the applications that determine successes or failures. An examination of the different vehicles that can be used to generate financial security for corporations and individuals will be provided. After defining the applications that generalize time value of money, an explanation will be offered regarding the components of interest rates by expanding on the concept that interest rate equates the future value of money with present value.

    Read More

  • Economics of the Automobile Industry

    2412 Words  | 5 Pages

    The Social Studies Help Center (n.d.). Monetary and Fiscal Policy. Retrieved November 5, 2011, from http://www.socialstudieshelp.com/eco_mon_and_fiscal.htm

    Read More

More about Time Value Of Money

Open Document