Time Value of Money in Financial Management
Time value of money is considered as one of the fundamental concepts in the finance. The term
time value of money can be defined as the money in hand today have more worth than the money that a person expect to have in future. Money in hand has worth because it can be invested into business and can provide benefits in future. The main purpose of learning the time value of money mathematics is to quantify the value of money or dollar with respect to time. However, this can be calculated with the help of rate of return on the investment. The time value of money mathematics is used in many different fields of finance for example; Corporate Finance including capital budgeting, Stock valuation, bond valuation etc. In other words, the time value of money mathematic plays important role in the field of finance. Time value of money is divided into two areas the first is present value and the second is a future value (Drake & Fabozzi, 2010).
Time value of money (TVM), is important in the for the managers; as the manager through using the theory can become able to take the future decisions, without the TVM, no manager could able to take the decisions effectively, TVM, consider the various aspects that indulge with the business, the mathematical risks are also identified. However, the decisions could be related to the cash flows or the allocation of the capital and the return on investment. Moreover, those projects could also calculate who have different cash flows; the managers could not allocate the capital or take the decisions if the theory is not followed. Example, the time value mathematical analysis is done that the value of money today will remain the same after one month, the calculation of inflation etc. are considered while calculating TVM. This article is about Time Value of Money Mathematics Learning Purpose which also states that TVM manager can take effective decisions for the future…
References:
- Drake, P. P., & Fabozzi, F. J. (2010). The Basics of Finance: An Introduction to Financial Markets, Business Finance, and Portfolio Management. John Wiley & Sons.