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Week 3 Discussion

COLLAPSE

Time Value of Money

Please respond to the following:

  • Examine the concept of the time value of money in relation to corporate managers. Propose two (2) methods in which time value of money can help corporate managers in general.

Student response

Danielle Debardelaben

RE: Week 3 Discussion

COLLAPSE

Overall Rating:
  • Time value of money suggests that money received at a certain point of time has a different value.
  • It is the idea that a certain amount of money today is worth more than the same amount at a future date.
  • It is a concept that an amount that you have today is worth more than the promise or expectation that you will receive from an amount in the future.
  • Time value of money is a concept to understand the value of cash flows occurred at a different point of time.
  • Money that we hold today is worth more because it can be invested and interest can be earned.
  • Managers use time value to calculate the present value of both a sum of money and a stream of cash flow.
  • An example would be a company investing in a piece of equipment or buying a building.
  • The time value of money would be used to calculate the present value of either of their cash flows.
  • If we are given the choice to accept $500 today or one year from now, then we should certainly accept the $500 today due to time value of money.
  • Every sum of money received earlier has reinvestment opportunity.
  • For example, if we deposited $ 100 in saving account at 5% annual rate of interest, it will increase to $105 at the end of one year.
  • Money received at present is preferred even if we do not have reinvestment opportunity.
  • The reason is that the money that we receive in future has less purchasing power than the money that we have at present due to the inflation.

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