Time Value Of Money

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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...

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...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.

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