The Time Value of Money
Financial mangers make decisions today that will affect the firm in the future. The dollars used for investment expenditures made today are different from the cash flows to be realized in the future. What are these differences? What are some of the techniques that can be used to adjust for these differences?
When it comes to understanding the difference between finances today and finances in the future, it is important to understand Time Value of Money. The Time Value of Money shows that money available now and the same amount in the future can be different. This is based on the possibility to earn money on interest, any amount of cash now is worth more, sooner than later. This gives the company more time to grow the cash rather than waiting for it.
If the options of money now or in the future are different amounts, it can be more confusing. By calculating the time value of money, it gives an opportunity to find the current price of future cash flows and vice versa. Using formulas such as Future Value and Present Value will help a company decide which option is better for the business.
Future value shows the amount of cash invested today and what it can grow to in the future. The present value shows the opposite, it determines what the expected cash flow from the future is worth in today’s dollars. When making financial decisions for the future of the business, these are a couple of the techniques used to help figure out what is the best option for a company.
When it comes to understanding the difference between finances today and finances in the future, it is important to understand Time Value of Money. The Time Value of Money shows that money available now and the same amount in the future can be different. This is based on the possibility to earn money on interest, any amount of cash now is worth more, sooner than later. This gives the company more time to grow the cash rather than waiting for it.
If the options of money now or in the future are different amounts, it can be more confusing. By calculating the time value of money, it gives an opportunity to find the current price of future cash flows and vice versa. Using formulas such as Future Value and Present Value will help a company decide which option is better for the business.
Future value shows the amount of cash invested today and what it can grow to in the future. The present value shows the opposite, it determines what the expected cash flow from the future is worth in today’s dollars. When making financial decisions for the future of the business, these are a couple of the techniques used to help figure out what is the best option for a company.